US oil import affects tankers
Lower US imports for crude oil over the past three years have more than offset the increase in Chinese imports due to an energy boom. That meant lower demand and shipping rates for crude tankers like VLCCs and Suezmax. Factors that have a direct impact on US imports include domestic oil production, drilling activity, domestic consumption, refining capabilities, and law.
US product oil export may provide insight
Because the DOE (Department of Energy) publishes production data two months late, it’s not that useful for understanding what’s going on in the crude tanker business. However, the department does publish export figures for product oil weekly. Changes in US product oil export can offer some insights.
Let’s assume first that the US doesn’t import any crude oil. This means any excess oil that the US produces will ship out. Now, if the US does import crude oil to make up for domestic consumption, then an increase in product oil export likely suggests the US is more self-sufficient based on current consumption and doesn’t need to rely on imports as much.
Higher product exports are negative for crude tankers
The past five years of data show that there’s a general inverse relationship between growth in US product oil export and the Baltic Tanker Dirty Index. When the US exports more product oil, as the law requires the country to export crude oil except for limited situations, year-over-year growth in the Baltic Tanker Dirty Index is negatively affected.
Since May of this year, product oil exports in the United States have been on the rise. This likely suggests unfavorable demand for tankers and imported oil. The EIA estimates that the majority of incremental oil production will come from the United States—an addition of approximately 1 million barrels of oil in 2014 and 2015.
US oil supply expected to remain strong
Lately, we’ve seen the US benchmark oil price, WTI (West Texas Intermediate), fall on increased inventory in the United States. Lower refining activity and weaker demand, which leaves more crude oil hanging in the industry supply chain, were reasons for the build. While these are temporary weaknesses, chief investment officer Hakan Kocayusufpasaoglu at Harbridge Capital AG—a hedge fund based in Zug, Switzerland—said, “Supply figures in the U.S. are going to be overwhelmingly strong for the foreseeable future,” likely referring to further increases in US oil production.
Negative impact on dry bulk shippers
If we continue to see product oil export grow above 10% year-over-year, then we’ll likely see negative pressure on crude tanker rates. This bodes unfavorably for stocks and ETFs like Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), Frontline Ltd. (FRO), and Tsakos Energy Navigation Ltd. (TNP). The Guggenheim Shipping ETF (SEA) will also be negatively impacted, to a lesser extent.