The dynamics of global oil trade and demand for crude tankers (Part 6 of 8)
Chinaâ€™s crude oil import: The most important factor
Ultimately, the indicator that has a first-degree influence on tanker rates is Chinaâ€™s crude oil import volume. When import volume rises, more tankers will be used, which pushes up shipping rates. Conversely, lower import volume means increased number of idled ships, which leads to increased competition. Increased competition will pressure shipping rates and negatively affect the revenues, earnings, cash flow, and share prices of tanker stocks.
In July 2013, China had imported 6.29 million barrels of crude oil a dayâ€”an increase of almost 1 million barrels from June. The countryâ€™s import is now above the long-term trend line. Analysts and investors use trend lines to adjust for short-term noise as well as economic cycles. When imports are significantly below the trend line, as they were in 2009, you can expect oil imports to increase on the condition that the historical trend will continue. The disadvantage of using this tool is that if some fundamental changes, it alters future growth compared to the past.
Crude oil imports havenâ€™t grown much since 2012
Since near the end of 2011, the above chart shows that oil imports didnâ€™t quite follow the average growth in oil import volumes seen over the past nine of ten years. The sideways action in oil import suggests lower or close-to-zero growth in oil imports over the past few months, caused by Chinaâ€™s weaker economy since 2011, after high inflation driven by record stimulus in 2009 prompted the government to raise interest rates to cool the economy.
Yet itâ€™s important to note that crude oil import continued to grow in 2012, with import holding above the long-term trend line despite softening economic growth due to stockpiling activity. As a result, the governmentâ€™s action to support economic growth during the later half of 2012, which followed through into 2013, didnâ€™t translate into higher imports.
How Chinaâ€™s crude oil import will affect tanker demand and rates
Julyâ€™s jump of 1 million barrels of crude oil has positively supported shipping rates. But unless crude oil imports an average of more than 6.7 million barrels a day through the end of this year, itâ€™s unlikely that China will be able to fill the decline in U.S. crude oil imports estimated by the EIA (Energy Information Administration) for this year. This bodes negative for Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), and Teekay Corp. (TK), as well as the Guggenheim Shipping ETF (SEA).
Browse this series on Market Realist:
- Part 1 - The dynamics of the global oil trade and demand for crude tankers
- Part 2 - Oil firms focus on production development in the United States
- Part 3 - U.S. oil production could slow in 2014, benefiting crude tankers
- Commodity Markets
- crude oil