Betting on a Chinese stock rebound? Crude tankers might be better (Part 9 of 13)
Production’s impact on imports
It’s well known that higher crude oil production in the United States will have a negative impact on its imports. After all, that’s what’s been happening over the last few years, driving tanker rates lower and contributing to Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), Tsakos Energy Navigation Ltd. (TNP), Frontline Ltd. (FRO), and the Guggenheim Shipping ETF’s (SEA) underperformance. But even with higher domestic production, crude imports may not fall further.
The chart above shows the United States’ weekly oil imports from countries such as Kuwait, Colombia, Venezuela, Saudi Arabia, and Iraq, and another for major OPEC (Organization for Petroleum Exporting Countries) nations.
Kuwait, Colombia, Venezuela, Saudi Arabia, and Iraq are part of major OPEC nations that ship crude oil into the United States, but they generally produce crude that’s low-grade (heavier and sourer), as opposed to the higher-grade (light sweet) crude produced in the United States.
Higher-grade crude yields larger volumes of premium products such as gasoline, but it doesn’t yield as many lower-value products due to chemical differences. In the past, refiners spent millions of dollars on equipment that would allow them to produce larger amounts of premium products from heavier and sourer crude. As the economics maybe isn’t there to change existing capacity to accommodate lighter and sweeter crude, demand for crude from Kuwait, Colombia, Venezuela, and Saudi Arabia remains strong.
Major OPEC nations’ oil imports fell throughout 2013, while those from lower-quality-crude–exporting nations floated mostly sideways. On March 14, 2014, imports from major OPEC totaled 3,511 thousand barrels a day, while imports from heavy crude exporters amounted to 3,407 thousand barrels a day.
The difference between the two indicators has averaged just 250 thousand barrels since the start of 2014—half the 564 thousand barrels average difference in 2013. If the difference remains minimal, we could assume these imports from other major OPEC nations are of low grade, which would be positive for the crude tanker business.
Browse this series on Market Realist:
- Part 1 - Betting on a Chinese stock rebound? Crude tankers might be better
- Part 2 - Why China’s initial March PMI could be bad for oil tankers
- Part 3 - China’s relatively stable post-2013 loan growth helps oil tankers
- Commodity Markets