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The US having become a major oil producer has not only impacted the

oil price but also has changed traditional trade patterns. Now the US have lifted their decades-old export ban on domestic crude – that could change things even further, at least in the long term
The traditional trades from the Middle East to the major importer USA have declined in the last five years, also[ds_preview] crude imports from West Africa, the Aegean, South America and the Caribbean. This has not negatively affected the tanker market. Redirecting volumes to Europe, India or Far East has instead increased tonne mileage and was a net positive for operators in 2015. Also worldwide demand grew. Shipbroker McQuilling observed an additional 730,000 bbl of crude intake at refineries.

The removal of the export ban on US crude oil that was in force since the early 1970s had raised much attention and also questions, whether this would affect the tanker market. Two months after the USA has joined the list of exporters again the effects are still limited.

When in January the pricing of crude grades, US WTI and North Sea Brent, was close to parity, British Shipbroker Gibson was sceptical in its US Tanker Report, whether the US will become a major exporter of crude in the nearer future. The US crude was less attractive on the international market, and Gibson questioned, whether the removal of the US export ban would ever shake up the market. But the situation has changed already, says Stefanos Kazantzis, Senior Shipping and Finance Advisor at shipbroker McQuilling. The price gap between US crude and foreign crude is widening right now. Looking at the actual figure the export volumes have been quite small, mostly Aframax vessels shipped US crude to Europe, South America and the Caribbean. Also exports to Asia have been reported. But at McQuilling the small volumes are not seen as a proof of US crude’s in-attractiveness.

»The bigger differential between US and foreign crude will certainly incentivize some refiners to at least test the crude at first go. We have to remember that US crude has not been available to foreign refiners historically,« Kazantzis explains. He does not expect a »mad rush« to start importing on a regular basis. Initial cargoes, smaller in nature, that are being tested is a perfectly logical step. It is important to see how the US crude fits within European refinery configurations, what product joules could be created, either on its own or by blending it with other crude. »If the results seem favourable, which we think they will because the US crude is of very high quality, the Northern European market may really benefit from that. European refiners typically like to produce high joule products like gasoline to ship back to the US. We expect that to be a story through 2016 and beyond.«

The market benefits

The removed export ban in combination with lower US oil production generates demand for tankers transporting US crude. The effect is two-fold, Kazantzis explains. At first, the Aframax market will benefit because of logistic constraints at the US coast, that make it difficult for larger tankers to load the US crude. »This could change in 2016 or 2017.« But it also removes domestic crude from the US refining system. The combination of lower production and more US crude not available to US refiners because of exports promotes a higher amount of foreign imports. That is a net positive for tankers because of the increased amount of marine transportation.

For 2016, lower US production due to the low price environment is expected to increase the amount of foreign imports that are coming into the US. »Our initial expectation is about 400,000 bbl a day of additional foreign imports. We think that the majority of those, about 270.000 bbl a day, will come from the Middle East,« Kazantzis says. Besides traditional trade partner Saudi Arabia, Iraq’s market share has recently gained. Also from West Africa more crude is expected, probably an additional 100,000 bbl a day this year as opposed to last year. Probably there will also be increased flows from the Caribbean, but less voluminous.

Also for product tankers the US remains an important import and export market. The US Gulf has been a big beneficiary of the US domestic production boom, as it has been able to access cheaper feedstock from US and Canadian production. That has led to attractive refining margins, which has increased the product exports from that region to the Caribbean, South America and Europe. On the Import side the lower retail gasoline prices have stimulated demand. In the US Atlantic coast region volumes coming from both Europe and Canada increase, but also much further from India and the Far East.

Jones Act and infrastructure

With crude export ban removed, there is some uncertainty about how this could conflict with the Jones Act. Exports leaving the US are under no Jones Act restrictions, only in case of ship-to-ship transfer between a larger tanker in US waters and a smaller ship to a US port, the rules would apply – in case they are not suspended by the ambiguous phasing of the removal act.

However, McQuilling foresees growing pressure on the Jones Act tanker market itself. It has profited in the past from the export ban and increased US production combined with a lack of pipeline infrastructure between refineries along the US coast, particulary in the Gulf. This has been the demand driver for a significant amount of new tankers delivering in the next few years

One bottleneck for the export of crude from America is the lack of adequate infrastructure. Not exporting oil for decades, the US has terminals mainly for import and for loading smaller Jones Act tankers for shipments between US ports. To make long haul exports competitive, e.g. to Asia, scale effects of large shipments would be necessary. Most US oil ports only have capacity for loading ships up to Aframax size. The Louisiana Offshore Oil Port »LOOP« deepwater terminal in the Gulf of Mexico, is the USA’s only port that can accommodate VLCCs. But LOOP is an offloading terminal only, which means that certain reconfigurations of the terminal and the pipeline system would be necessary for imports – that could take some time. »To invest in that type of infrastructure without the volumes being there at the moment, is probably getting ahead of ourselves«, Kazantzis explains. He believes in a different scenario: initial cargoes will have be tested overseas and refiners then have to continue on a more frequent basis to source US crude before any significant investment is made. In the Gulf some terminals have plans to upgrade to Suezmax size but right now the Aframax is the vessel of choice.

Demand and supply

All in all, the current situation is a net positive for tankers because of the increased amount of marine transportation. The combination of these factors and others might lead to a demand in crude tankers of about 3% in this year. But owners should be careful, since the market is heading for pressure on the supply side.

Also the International Association of Independent Tanker Owners (Intertanko) sees the danger – as in every shipping sector – of over-ordering when the markets are strong. »The shipping industry does not have a good record of learning from the over-ordering mistakes of the past,« a spokesperson says.

McQuilling reports an increased amount of new orders that have been placed in the last three years. »The economic crisis took a toll on demand generally around the world,« Kazantzis says, »but sentiment among owners has improved. Contracting values have come down which has encouraged, with the help from investment dollars from finance markets‘ private equity side, owners to order a significant amount of ships that are scheduled to deliver over the next couple of years.«

In 2016, McQuilling is expecting the largest amount of tanker deliveries since 2009, close to 300 tankers of a minimum size of 27,500dwt, an inventory growth of 4% for crude and dirty tankers and 4.7% for clean tankers. In 2017 those numbers are even a higher on the crude side (5.7%). »Although we expect healthy demand 2016, 3% dirty, 4.5% for clean, we expect it to moderate over the four years after 2016 with a pressure on rates through the increase in supply in 2016 and 2017.«

The recently reported agreement between Russia and Saudi Arabia, who are aiming to freeze crude production volumes, could at least halt the fight for market shares in the oil market – in case it will ever happen. Both countries want at least to stop increasing worldwide oil production, to stabilize the prices. Therefor they seek the support of other oil producers. That could be a warning for tanker operators not to rely on strong demand for tonnage forever.

Felix Selzer