The dynamics of global oil trade and demand for crude tankers (Part 8 of 8)
Growth in other countriesâ€™ consumption
Although China and the United States are two countries that have the largest impact on the global shipments of crude oil, investors should still consider what oil demand is like outside these two countries. Luckily, the EIA (Energy Information Administration) provides detail on other countriesâ€™ consumption growth in its short-term energy outlook. If growth in other countries can offset growth in production from non-OPEC (the Organization of Petroleum Exporting Countries) nations, VLCCs (very large crude carriers, which primarily haul crude oil from the Middle East to the rest of the world) will benefit. Conversely, if it canâ€™t, VLCC demand and rates will be negatively impacted.
Consumption in other countries expected to increase just as much as Chinaâ€™s
According to the administrationâ€™s August short-term energy outlook, oil consumption in other countries is likely to increase by ~0.5 million bbl/d (barrels a day) in 2013. The industry noted that liquid fuels consumption forÂ OECD (Organization of Economic Cooperation and Development), which includes major developed economies, fell by 550,000 bbl/d in 2012. The EIA projects that OECD consumption will decline by an additional 320,000 bbl/d in 2013 and 180,000 bbl/d in 2014, largely because of declining consumption in Europe and Japan.
Why the EIAâ€™s estimates arenâ€™t too pessimistic
While economic activity in Japan is on the rise with the stock market soaring this year, and European manufacturing activity appears to be in a period of recovery based on its PMI (purchasing managers index) data, the decline in oil consumption could be limited on a year-over-year basis for the remainder of this year. Comparing the declines during the first seven months of 2013 to the same period in 2012, European oil consumption is down by 570,000 bbl/d. Japanâ€™s oil consumption is down by 137,000 bbl/d over the same period. So while the decline of 320,000 bbl/d estimated by the EIA might have seemed too pessimistic, the EIA is already estimating oil consumption to improve throughout the later half of 2013.
Non-OPEC production to outpace world oil consumption growth
The EIAâ€™s outlook is not quite positive for tanker demand eitherâ€”despite estimated higher oil use for the remainder of 2013. Several tanker companies have mentioned that higher oil demand in the third and fourth quarters will support tanker rates. That may be true, but the EIA expects non-OPEC production to outpace world oil consumption for the rest of 2013 and in 2014 by approximately 500,000 bbl/d. This bodes negative for tanker demand and rates, as it means OPEC will likely cut production if oil prices fall, suggesting less demand for crude tankers. Although the EIA has taken into account disruptions in Syria to an extent, it has yet to factor in the outcome of a possible military intervention. Septemberâ€™s report, due to be released on September 10, is an important report to watch. Weâ€™ll update some of these indicators once itâ€™s released.
Investors shouldnâ€™t get caught in short-term rallies
Crude tanker companies such as Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Teekay Tankers Ltd. (TNK), and Teekay Corp. (TK) can expect sustained depressed tanker rates over the medium term, which will negatively impact share prices. Investors should note that if share prices jump due to higher rates, they arenâ€™t likely to last long.Â While the Guggenheim Shipping ETF (SEA) will also be negatively affected, it also invests in other types of shipping companies that appear to be performing much better.
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
- oil consumption
- crude oil