Commodity Analysis

Some truths about the oil market

| Updated on February 25, 2019 Published on February 25, 2019

Usually three or four empty supertankers sail empty to the US at any one time

Twelve empty supertankers slowly plough their way across thousands of miles of ocean toward the Gulf of Mexico coastline. As they do, they reveal a few truths about today’s global oil market.

Normally, the vessels would be filled with heavy, high-sulphur, West Asian oil for delivery to refineries in Houston or New Orleans.

Not now though. The 12 are sailing 21,000 miles from Asia, all the way around South Africa, without cargo — holding nothing but seawater for stability — because producers in West Asia are restricting supplies.

In addition, America’s booming volumes of light crude need to be exported, and there aren’t enough supertankers in the Atlantic Ocean for the job. So, they’re coming back empty.

“What’s driving this is a US oil market that’s looking relatively bearish, with domestic production estimates trending higher, and persistent crude oil builds we have seen for the last few weeks,” said Warren Patterson, head of commodities strategy at ING Bank NV in Amsterdam. At the same time, OPEC cuts are supporting international grades such as Brent, creating an export incentive.

The US exports and imports large amounts of crude because the variety it pumps — especially newer supplies from shale formations — is very different from the type that’s found in West Asia.

Organisation of Petroleum Exporting Countries (OPEC) members are likely cutting heavier grades while American exports are predominantly lighter, Patterson said.

Gasoline glut

By industry standards, American oil is considered light and low in sulphur, making it great to churn out gasoline. This has resulted in a build-up of automotive fuel.

In contrast, the West Asian crude often needs more processing — not a problem for the Gulf of Mexico plants that were specifically designed for the task — but it has a smaller gasoline yield.

There will be a lot of growth from US light oil this year, said James Davis, director of short-term global oil service, Facts Global Energy. “This will continue to push US exports up.”

Shippers are counting on the US exports to help the tanker market withstand supply restrictions by the OPEC and allies including Russia.

Industry analysts, who raised their estimates for what they think the ships will earn this year after the OPEC+ pact was announced in December, cite rising American shipments as a contributing factor.

There are usually three or four empty supertankers — very large crude carriers in industry jargon — that sail empty to the US at any one time, according to shipbrokers.

The shift has produced knock-on effects around the shipping market.

Daily earnings for very large crude carriers (VLCCs), which can haul two million barrels of oil, on the benchmark West Asia-China route doubled since last week to $29,494, according to Baltic Exchange data.

“Following a fixing frenzy from the US Gulf Coast late last week, most available tonnage in the Atlantic basin has been soaked up,” said Espen Fjermestad, an analyst at Fearnley Securities AS in Oslo. With ships ballasting West, rates have gone up in the East as well. Bloomberg

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