How breakdown of oil demand affects crude oil shipping

Market Realist

An overview of crude tanker industry (Part 4 of 10)

(Continued from Part 3)

Breakdown of oil use

The breakdown of oil use is another key point to know because it affects oil demand and imports, which in turn influences tanker demand and oil exports. As mentioned earlier, the world’s three largest groups of oil importers are United States, Europe and China/India.

Transportation and industrial

In 2011, transportation and industrial made up the majority of petroleum use in the United States. The transportation sector used as much as 71.01% of the country’s oil demand while industrial use accounted for 23.17% in 2012, according to Energy Information Agency. For the world as a whole, use of oil in transportation makes up a smaller percentage at roughly 57.38%, while transportation makes up 34.00%. This is because countries in OECD Europe and China use a smaller percent of total oil for transportation and more for industrial uses.

Economic influence

Transportation and industrial sectors are largely driven by economic and manufacturing activities. Thus, when macro leading indicators like the manufacturing purchasing managers’ index, initial unemployment claims, unemployment rates, and number of working hours are improving, they often suggest improved demand for oil imports and crude tankers. Note, however, as demand for oil can fluctuate significantly, demand for tanker can be volatile over a business cycle (just like oil price). This means investors are better off investing in companies like Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Tsakos Energy Navigation Ltd. (TNP) and Teekay Tankers Ltd. (TNK) as a cyclical play rather than using a buy and hold strategy.

Auto sales

Since transportation is a significant user of oil, auto sales have influence over oil demand too. This is particularly true in countries like China with high growth: as more people buy vehicles to drive, the more they’re likely to use. Plus, these aren’t cheap, so when people do purchase, it may imply improved current or expectation of economic activity.As these assets are usually financed with debt, high auto sales could be driven by central bank’s push to lower (or maintain) a low interest rate as an incentive to spend.

For investors who’d like to dive in further, construction activity (particularly the housing sector) is something interesting to watch. Aside from using vehicles for personal transportation purposes, they’re also used to haul industrial goods. And products like wood, steel, bricks and concrete are pretty heavy materials.

Continue to Part 5

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