Why Brazil’s Libra auction is a long-term positive for VLCCs

Market Realist

Key crude tanker stocks updates, September 27–October 8 (Part 8 of 8)

(Continued from Part 7)

Brazil expected to boost oil production

An increase in oil investment in Brazil could boost tanker traders in the future. A recent report by Lloyd’s List Intelligence explains that Brazil is opening up its upstream oil sector to investment of approximately $237 billion over a five-year period to boost production and refining capacity. This would be the first auction held in five years, which has negatively affected the country’s domestic production and led to increased oil imports since 2010.

 

China: A major export destination

Should Brazil realize its goal, tanker owners will likely benefit. In 2012, Brazil had exported 6.52 million metric tonnes of crude oil to China—its largest customer, which makes up close to a quarter of its total export volume. All these crude shipments used the largest fleet class, VLCCs (very large crude carriers), and traveled through the South Atlantic and Indian oceans to reach China.

Longer routes mean less supply

While volume is one factor that will drive demand, distance is another. The benchmark crude oil trade routes today start from West Africa or the Middle East. That will change in the future, as non-OPEC (Organization of the Petroleum Exporting Countries) countries increase their production of crude oil.

As shipments from Brazil to China will take longer than shipments from the Middle East to China, it’s the same thing as saying there will be fewer tankers available to ship a specific amount of volume. Consequently, this will be a long-term positive for tanker rates and benefit major VLCC operators like Frontline Ltd. (FRO), if the company does survive through through a possible bankruptcy or restructuring, and Navios Maritime Acquisition Corp.’s (NNA) VLCC ships.

Shipments to the US can decline and be replaced with China

Shipments to the US, which are mostly employed on Suezmax and Aframax vessels that are smaller than VLCCs, could face declines as the United States increases its own domestic production. The oil found in the United States is lighter and sweeter, unlike the heavy and more acidic oil that Brazil mostly produces. That means Brazil will have to find a different customer, likely China, which would further decrease tanker supply and boost rates. The downside risk to this scenario is if US refineries capable of refining heavy crude continue to purchase oil from Brazil at a discount and receive higher margins.

Some shuttle tankers will also benefit

The upcoming October 21 oil field auction for the Libra oil field, which is estimated to be Brazil’s largest oil find thus far, will also increase demand for shuttle tankers that are used to transport crude oil from off-shore fields to on-shore destinations. Companies that have operations in Brazil with shuttle tankers include Teekay Offshore Partners LP (TOO) and Tsakos Energy Navigation Ltd. (TNP). The Guggenheim Shipping ETF (SEA) will also benefit from higher activity in offshore oil production and oil shipments.

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