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Why increased US domestic oil is negative for crude oil shippers

Xun Yao Chen

Key crude tanker stocks updates, September 27–October 8 (Part 6 of 8)

(Continued from Part 5)

The significance of US oil consumption

As the single largest oil importer in the world, the United States’ oil demand can have a large impact on oil import and crude tanker demand. If US demand for oil grows, even in the face of increasing domestic production, imports could continue to rise. On the other hand, if demand isn’t growing as fast as domestic production, it negatively affects crude tanker demand.

Domestic production rises, while demand has been left low

The US market is now above where it was back in 2008, as corporate profits grew to records. But oil consumption hasn’t recovered, and it stood at 19.08 million barrels a day in August, down from 19.09 million barrels a day in July. The share of domestic oil producers grew from just 25% pre-2007 to now near 40%. We can attribute three main factors to the general weakness in oil consumption over the past five years: slow recovery, fuel economy, and alternative energy.

Labor market not recovering as quickly

Lately, the unemployment rate has stood around 7.5%—much higher than the 5% we saw in 2008. And that doesn’t include people who are discouraged and not actively seeking a job. The weakness in the labor market translates to less going out and traveling, which has negatively affected gasoline consumption—the primary oil product used in autos—and, to a lesser extent, diesel.

Fuel economy has been improving

With oil prices high at around $100, even though the global labor market wasn’t recovering as quickly, people were discouraged from using cars as often. Seeing the problem in high oil price and the possibility that oil may run out one day, car companies that were once all for petroleum-based autos began making hybrid and electric cars. The law introduced policies to protect the environment and reduce pollution, which has also supported the new trend for companies relying less on gasoline and improving fuel economy—how much gasoline a vehicle needs in order to run a certain distance.

Oil for industrial, commercial, and residential use has fallen

Driven by the natural gas boom, low natural gas price has contributed to lower demand for oil, as people used more natural gas to heat buildings, run refrigerators and autos, and generate electricity (primarily for private households). Coupled with weak construction and industrial (mining and manufacturing) activities in the United States, these industries are also shifting towards alternative energy sources to power their machines.

Industrial activity provided some spark in summer, though not enough

Recently, we’ve seen US oil demand rise at its fastest pace in two years, led by industrial activity and increased car use. That has given tanker stocks some excitement. But a report released by the EIA (Energy Information Administration) on October 8 pointed out that the gap between oil consumption and domestic production (net import of oil) averaged 6.24 million barrels a day in the US and 6.3 million barrels a day in China.

Unfortunately, China became the largest net importer not because China boosted imports, but rather US net imports fell. This likely reflects higher product oil exports or lower crude oil imports. This is negative for tankers with large exposure to crude tankers such as Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Tsakos Energy Navgitation Ltd. (TNP), Teekay Tankers Ltd. (TNK), and the Guggenheim Shipping ETF (SEA).

Continue to Part 7

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