Why oil tankers could follow the dry bulk shipping recovery (Part 7 of 12)
Whether the past three years of negative U.S. oil imports will continue remains a question mark. Cheap high-quality U.S. oil priced on the WTI (West Texas Intermediate) benchmark has lured refiners away from using more domestic crude than foreign crude. Imports from Nigeria, Angola, and Algeria, which produce large amounts of high-quality crude (light and sweet), had fallen close to zero by the end of 2013.
Breaking down U.S. imports
Conversely, imports from Kuwait, Colombia, Ecuador, Venezuela, Saudi Arabia, and Iraq have remained strong over the last few years. On December 2013, the U.S. imported a total of 3,385 thousand barrels of oil a day from these countries, while imports from Algeria, Nigeria, and Angola have fallen to just 191 thousand barrels. There isn’t much more to go before zero.
Light sweet crude yields greater-premium fuels such as gasoline. Heavy crude, on the other hand, has a higher portion of chemical composition geared towards producing diesel fuel or residual fuel oils that sell to ships or power producers. Some refiners have equipment that allows them to add certain chemicals to heavy oil to produce more premium fuels.
Is switching easy or cheap?
As some refiners spent a large amount of cash on equipment to refine heavier and sourer crude in the past, they might as well just use them as long as they can make profits. Refiners likely face limits on how much light sweet crude they can use, since crude imports from heavy-grade regions haven’t fallen much. It’s also probably not a simple or cheap process to convert a refinery geared towards heavier and sourer crude to one that can process lighter and sweeter crude.
Be prepared for U.S. oil imports to stop falling. As long as oil imports don’t fall much, tanker stocks like Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), and Tsakos Energy Navigation Ltd. (TNP) as well as the Guggenheim Shipping ETF (SEA) should benefit.
Browse this series on Market Realist:
- Part 1 - Could oil tankers follow in dry bulk shippers’ and BDI’s footsteps?
- Part 2 - Why spot rate volatility is positive for oil tankers like Frontline
- Part 3 - Oil tanker rates and stocks rallied, but investors remain cautious
- Basic Materials Industry
- oil tankers
- Light sweet crude