Why US product oil exports could increase 2 million barrels a day

Market Realist

Key drivers that affect refined oil shipping (Part 7 of 8)

(Continued from Part 6)

Refiners can affect product tankers

As we saw in the last article in this series, the WTI-Brent spread can influence refiners’ decisions to switch from imported oil to the cheaper domestic oil, and vice versa. So it’s also important for investors to understand the refining landscape in the United States. Changes in the global refining center can have a positive or negative impact on product tanker demand, trade distance, and stocks like Capital Product Partners LP (CPLP), Scorpio Tankers Ltd. (STNG), Navios Maritime Acquisition Corp. (NNA), and Tsakos Energy Navigation Ltd. (TNP) as well as the Guggenheim Shipping ETF (SEA).

Why the U.S. can export 2.5 million barrels 

The utilization rate has fallen from above 90% in September to just 87% as of November 1, 2013, since some refiners went into maintenance. The current total capacity available in the United States is 17.8 million barrels of crude oil a day, which is about two to three million barrels higher than it was over the past two months.

Suppose that the WTI-Brent spread narrows in the near future and that the current domestic oil supply used to meet domestic consumption stays the same. If the rest of the domestic demand is supplied by imports, the excess domestic oil produced will be be exported. Based on current statistics, U.S. product oil exports can increase by a further ~2.5 million barrels a day.

Limitations

However, there are factors that may limit the utilization rate of close to 99%. Refiners that are being shut down right now are probably more expensive to operate. So, unless industry profitability improves and refiners that are now nonoperational can refine at profits in the future, gains in utilization could be limited and we may not see an increase in product oil exports of 2.5 million barrels.

Since refining plants are capital-intensive and require strict permits, there haven’t been many new refining capacity increases over the last decade. As a result, much of the capacity increases over the past ten years has been driven by expansions on existing refineries rather than whole new plants. So, despite an energy boom in the U.S., refiners haven’t stepped up capacity expansion due to high risk.

Why refiners aren’t expanding

Further increases in refining capacity, which will draw more oil from domestic production sites and lessen the current supply glut, will negatively impact current refiners. This is because refiners make profits based on the difference between crude oil prices and gasoline prices. Since gasoline prices are often based on Brent crude because marginal-cost refiners use Brent Crude rather than WTI as an input, the current supply glut is positive for refiners. A discount in WTI price means lower input costs and higher earnings. So, if the supply glut clears, input costs will rise and earnings will fall. This bodes unfavorably for refiners.

Capacity isn’t a bottleneck

Although refining capacity isn’t increasing rapidly, an additional ~2 million barrels a day of product oil output is enough to meet expected production growth of 2 million barrels, according to the EIA (Energy Information Administration) over the next two years. This means capacity wouldn’t be a bottleneck for higher product oil exports, which is positive for product tanker demand and stocks like CPLP, TNP, NNA, STNG, and SEA.

Refinery insight prepared with Ingrid Pan, Senior Energy Analyst. For more information on refining, please visit Crack Spread 101.

Continue to Part 8

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