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Set sail to the east: Longer trade routes support tanker demand

Xun Yao Chen

Why oil tankers could follow the dry bulk shipping recovery (Part 5 of 12)

(Continued from Part 4)

Shifting trade

One key theme that contributed to the recent rise in tanker rates is shifts in trade routes. In the past, the majority of oil was shipped from the Middle East and West Africa to developed countries. But crude oil shipments from countries in Latin America and West Africa to China are on the rise. This is either because these countries need to find new customers due to falling U.S. imports, because China seeks to diversify its oil resources, or because prices are cheaper.

Shifting Trade Dynamics

Set sail to the east

Not only is China likely to become one of the major oil importers in the years to come, with oil consumption per capita much less than the developed world’s, but ton-miles will also continue to add oil demand. Growth in shipments to emerging markets in Asia is expected to be enough to offset demand from countries and regions such as the United States and Canada, Europe, Latin America, Africa, and Japan. Of course, this will depend on China’s economic growth, car sales, and industrial activity.

Longer voyages

A voyage from the Arabian Gulf to China takes about 5,500 ton-miles. From West Africa or South America to China, it takes almost double that distance. As the bottom left of the infographic above shows, shipments of crude oil from West Africa and South America are equally important to the global seaborne crude oil trade as shipments from the Arabian Gulf.

Cheaper Latin American oil

But the story doesn’t end with China. Surging U.S. crude output has made Latin American oil cheaper than Middle Eastern oil. And Asian countries, including Japan and India, have been buying. Latin American oil is mostly priced off of the United States’ WTI (West Texas Intermediate), the U.S. benchmark, whereas the Middle East follows the Dubai benchmark. As some investors may know, WTI prices have historically traded at a premium to international oil prices because  of their higher quality.  But a surge in U.S. production resulted in a supply glut, so that WTI prices are now at a discount.

These trends affect crude tankers such as FRO, NAT, TNP, TNK, and the Guggenheim Shipping ETF (SEA).

Continue to Part 6

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