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Oil production in the US continues to surge: A possible negative?

Xun Yao Chen

8 charts on US oil crucial to investing in crude tankers (Part 2 of 9)

(Continued from Part 1)

The impact of U.S. oil production

As our crude tankers series noted, the U.S. is one of the largest crude oil importers by country. This means changes in U.S. demand for imported oil will have a significant impact on business for crude tankers that ship crude from the Middle East, West Africa, and South America (Saudi Arabia, Nigeria, and Venezuela, for example). But a rise in domestic oil production can also negatively affect imports if refiners could refine them, which has been a key driver of lower tanker demand over the past few years.

US Oil Production 2013-12-24

Oil production keeps on rising

Since the discovery of shale oil, U.S. oil production has risen at a rapid pace. According to the Department of Energy, the U.S. was only producing about 5.50 million barrels of oil a day before 2011. That figure has risen to 8.11 million barrels a day of oil as of December 20, 2013—an increase from 8.02 million barrels a day reported for November 22, 2013. The last time that the United States saw this amount of oil produced domestically was 1988.

Hitting 9.60 million by 2014

In December, the EIA (Energy Information Administration) sharply raised its annual output projections for U.S. crude output. The administration sees 9.60 million barrels per day, which compares to some 7.6 million barrels a day of output noted in last year’s “Annual Energy Outlook.”

Positive or negative for crude tankers?

If U.S. oil production continues to increase and it’s used to replace imported oil, fewer crude tankers will be employed to move crude from areas like the Middle East, West Africa, and South America to the United States. This case would negatively impact shipping rates, which has been the trend over the past few years and has contributed to depressed stock prices for Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Ltd. (TNP), and Nordic American Tanker Ltd. (NAT). The Guggenheim Shipping ETF (SEA) was also poorly affected.

A curve ball situation

There are ongoing talks that the U.S. could remove export bans that were imposed in the past to protect domestic energy security. If this scenario pans out, more oil will be exported out of the United States. This oil will most likely find its new home in Europe and Asia. Since it takes longer to transport oil from the United States than from the Middle East or West Africa to Asia, demand for crude tankers will rise as a result of longer traveling distances.

Continue to Part 3

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