Why an increase in domestic oil production puts a cap on oil tanker stocks

United States is the largest importer of oil in the world, accounting for about 15% of global transactions in 2009 according to the CIA World Factbook. Naturally, the country’s oil industry landscape has a significant impact on tanker stocks, like Teekay Corp. (TK), Overseas Shipbuilding Group (OSG), General Maritime (GMR), and Frontline (FRO). An increase in United States’ reliance on foreign energy is a positive for tanker stocks, while the opposite is negative.

From 2003 to 2009, imports accounted for roughly 47% of U.S. demand. In 2009, however, government policies encouraged domestic oil production to rely less on foreign energy. The uses of technologies including hydraulic fracturing and horizontal drilling have also made it easier for domestic companies to capture reserves that were once difficult to extract. Imports as a percentage of demand are no longer as high as 47%. On the other hand, domestic production increased from 5,000 to 5,600 thousand barrels per day as of this summer.

According to the International Energy Agency, United States will become the largest producer of oil by 2017, overtaking Saudi Arabia’s current number one position. In the second quarter of 2012, Saudi Arabia produced 9,900 thousand barrels of crude oil a day. For United States to overtake Saudi Arabia, its production needs to rise by 76.8% over the next five years. Already, more oil shipments are being redirected to the third largest importer of oil: China. However, China’s 2011 crude oil import was only 58.3% of United States’.

Tanker stocks’ performance will be increasingly reliant on China’s economic growth going forward. However, based on year-over-year-growth of 10 to 15% in import, it will take a while for tanker stocks such as Teekay Corp. (TK), Overseas Shipbuilding Group, Inc. (OSG), General Maritime Corp. (GMR), and Frontline Ltd. (FRO) to fully recover and enter a period of strong growth. Note that OSG and GMR are in bankruptcies right now. The Guggenheim Shipping ETF (SEA), which holds some tanker stocks, will also be negatively affected by this shift in macro dynamics.