Falling crude prices: Crude indicators review

 

 

 

Falling crude prices: Crude indicators review

 
Falling crude prices: Crude indicators review (Part 1 of 8)

The crude tanker industry and its performance

Oil tanker basics

There are two primary types of oil tankers: crude carriers for unrefined products and product carriers for refined products. Crude tankers are mainly used for the deep sea transport of crude oil from production sites to refineries. They range in size from 55,000 deadweight tonnes (or DWT) up to around 450,000 DWT. The main trading routes are from the production areas in the Arabian Gulf and West Africa to Asia, Europe, and the US.

 

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Industry dynamics

Global economic growth and the dislocation of consumption and production drives energy transport, which is reflected in cyclical freight rates that vary with vessel supply and demand. In this series, we will analyze the factors that drive the crude tanker industry and the performance of tanker companies.

First, we’ll look at the Baltic Dirty Tanker Index, which reflects the overall rate of transporting crude on water in tankers. Weekly US crude imports have changed the dynamics of the entire industry. Prices for newbuild and secondhand tankers are a vital force in reflecting the industry’s dynamics.

We will also explore the falling crude oil prices, their impact on companies, and contango, which benefits numerous companies. Contango is an oil market phenomenon in which the current or spot price is lower than the future price.

Industry and company performance

Since December 1, 2014, crude tanker companies such as Tsakos Energy Navigation (TNP), Frontline Ltd. (FRO), Teekay Tankers (TNK), Nordic American Tanker Ltd. (NAT), and DHT Holdings (DHT) have recorded increases of 9.15%, 189.7%, 46.4%, 29.4%, and 45.6%, respectively.

For the same period, the Guggenheim Shipping ETF (SEA), which tracks a basket of major shipping companies worldwide, fell by 0.21%. This change led SEA to underperform the S&P 500, which increased by 0.42% during that period.

 
Part 2
 
Falling crude prices: Crude indicators review (Part 2 of 8)

Baltic Dirty Tanker Index widens in January

Baltic Dirty Tanker Index

In order to ascertain revenue and earnings potential for the crude oil shipping industry, analysts and money managers follow the Baltic Dirty Tanker Index (or BDTI). The year-over-year growth numbers of the index have a significant impact on companies like Tsakos Energy Navigation (TNP), Frontline Ltd. (FRO), Teekay Tankers (TNK), Nordic American Tanker (NAT), DHT Holdings (DHT), and the Guggenheim Shipping ETF (SEA).

 

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December statistics

The Baltic Dirty Tanker Index widened to 862 on December 24, 2014, from 833, its December 2 closing level, recording a 3.5% increase. On a year-over-year basis, the index recorded a 13.5% decrease from 997 on December 24, 2013. As of its closing on January 7, 2015, the index stands at 884, compared to $1,014 on January 7, 2015.

The movement of the Guggenheim Shipping ETF is significantly associated with the Baltic Dirty Tanker Index, as oil and gas storage and transportation make up 36.8% of the ETF’s holdings.

Outlook

Analysts say lower crude prices make oil purchases attractive, triggering stockpiling and increased demand for tanker vessels. Also, demand for crude oil is generally higher during the winter. While this bodes well for the shipping industry, this could also be a temporary phenomenon. Increased crude supply should affect the shipping industry in the days to come, which may put freight rates under pressure. However, oil demand growth may subdue the effect of excess supply.

 
 
Part 3
 
Falling crude prices: Crude indicators review (Part 3 of 8)

US top oil producer; crude imports decline

US energy

The United States has gained significant strength in energy production and is currently the top oil producer in the world, surpassing Saudi Arabia for the past two years. The US Energy Information Administration (or EIA), which tracks global energy production and consumption statistics.

The EIA notes that the US has produced more oil than Saudi Arabia since the fourth quarter of 2012, and the country’s oil production surpassed Russia’s output in 2011. The EIA further adds that US energy production is about evenly split between petroleum and natural gas, while Saudi Arabia primarily produces petroleum.

 

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Declining oil imports

For the week ending January 2, 2015, US crude oil imports averaged at 6.9 million barrels per day (or bpd), a decline of 205,000 bpd from the previous week, according to EIA data. For the last four-week average as of January 2, 2015, crude oil imports into the US averaged 7.3 million bpd, 4.6% lower than same period in 2013, indicating high use of domestically produced oil than imported oil.

Domestic production

For the week ending January 2, 2015, the US recorded an average 9.13 million bpd, as compared to 9.12 million bpd recorded on December 26, 2014, and 8.15 million bpd for the same week in 2013. Domestic production levels are at historically high levels, while imports are at their lowest levels for more than a decade. The surge in production has contributed significantly to the steep fall in crude prices.

Current market update

The United States’s production growth has contributed to its ability to produce more oil than it imports for the first time in about 20 years. The Energy Information Administration expects American production to continue to grow in 2015, despite recent lower crude oil prices. Crude tanker stocks such as Frontline Ltd. (FRO), Teekay Tankers (TNK), Nordic American Tanker (NAT), and Tsakos Energy Navigation (TNP), as well as the Guggenheim Shipping ETF (SEA), may be affected negatively by rising production.

Keystone XL pipeline

Meanwhile, there is a current debate for building the Keystone XL pipeline. The US House of Representatives voted 266-153 to pass its bill to approve Keystone, a vote that included 28 Democrats. The Senate will take up its own bill, which is also expected to pass. However, President Obama has promised to veto the bill, and a veto-proof majority in Congress is still uncertain. This pipeline extension would stretch from Canada to Steele City, Nebraska, where it would connect with an existing pipeline that extends to the coast of Texas at the Gulf of Mexico.

 
Part 4
 
Falling crude prices: Crude indicators review (Part 4 of 8)

Increasing weekly products supplied

Products supplied

Products supplied indicates the consumption of petroleum products, measuring the disappearance of these products from their primary sources, including:

  • refineries
  • natural gas-processing plants
  • blending plants
  • pipelines
  • bulk terminals

Finished motor gasoline, kerosene-based jet fuel, distillate fuel oil, residual fuel oil, propane/propylene, and other oils are included in the calculation of total products supplied.

 

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Weekly products supplied

For the week ending January 2, 2015, the total product supplied stood at 19.3 million barrels per day (or bpd) as compared to 19.4 million bpd on December 5, 2014. Plus, all components of product supplied recorded an increase. There was a decline in the general classification for heavier oils that remain after the distillate fuel oils and lighter hydrocarbons are distilled away in refinery operations. However, distillate fuel oil, which includes heating oil and diesel, as well as residual fuel oil, did not see a decline.

Over the past four weeks, the average product oil supply was 20.2 million bpd of product oil, up from 19.9 million bpd from the same period last year.

Finished motor gasoline, which accounts for a major portion of the total products supplied, increased to 8.8 million bpd. This compares to 8.5 million bpd in the week ending December 5, 2014, as winter pushes oil demand higher. Distillate fuel oil dipped to 2.9 million barrels per day from 3.5 million barrels per day for the same period.

Effect on crude tankers

With product supplied rising on a year-over-year comparison, crude tanker peers like Frontline Ltd. (FRO), Teekay Tankers (TNK), Nordic American Tanker (NAT), and Tsakos Energy Navigation (TNP), as well as the Guggenheim Shipping ETF (SEA) may trade in the positive.

 
Part 5
 
Falling crude prices: Crude indicators review (Part 5 of 8)

Current vessel prices rising

Overview of vessel prices

On a weekly basis, vessel prices indicate the currently trading prices of Very Large Crude Carriers (or VLCC), Suezmax, and Aframax, and their weekly changes. With weekly prices indicating short-term performance of the crude tanker industry, we will also look at the four-week average prices in order to smooth out and better understand the data. Depending on its size, a tanker takes two to three-plus years to build, with each tanker costing upward of ~$60 million.

 

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Current prices

VLCCs’ newbuild prices for the week ending January 6, 2015, stood at $106.04 million. This compares to $100 million the previous week and $101 million in first week of the prior month’s levels, according to data from Vessel Value Ltd. This level is close to its 52-week high of $106.17 million. The past four-week average saw current prices at $102 million, compared to $89 million in the same period last year.

Suezmax prices touched its 52-week high of $77.7 million in the week ending January 6, 2015, compared to $75.4 million in the prior week and $77 million in same week during the previous month. Plus, the four-week average stood at $76.05 million, compared to $58 million in the same period a year ago.

Aframax prices stood at $58.6 million, its 52-week high level, as of the week ending January 6, 2015. This compares to $56.55 million in the prior week and $55.8 million in the same week during the previous month. The four-week average was ~$57 million, compared to $47.1 million in the same period a month ago.

Impact on markets and companies

With current vessel prices recording weekly and year-over-year growth in all classes, the Guggenheim Shipping ETF (SEA) and tanker companies such as Teekay Tankers (TNK), Tsakos Energy Navigation (TNP), Frontline Ltd. (FRO), and Nordic American Tanker (NAT) are likely to benefit.

 
 
Part 6
 
Falling crude prices: Crude indicators review (Part 6 of 8)

5- and 10-year VLCC and Suezmax weekly prices on the run-up

Newbuild and secondhand vessel prices

Weekly price changes of secondhand vessels have a significant impact on the crude tanker industry. Weekly vessel values have been on the rise, with positive week-over-week and significant year-over-year growth. Secondhand vessel prices tend to be more responsive to changes in current rates.

 

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Secondhand vessel values

For the week ending January 2, 2015, 5- and 10-year-old VLCC prices stood at $63.35 million. This compares to $57.43 million in the previous week and $57.89 million during the same week a month ago. Notably, the VLCC 10-year-old vessel value touched its 52-week high of $50.31 million in the week ending January 2, 2015. Plus, the VLCC 5- and 10-year-old, four-week average stood at $58.94 million, compared to $50.27 million in the same period a year ago.

For the week ending January 2, 2015, 5-year and 10-year-old Suezmax prices stood at $48.63 million, compared to $44.61 million in previous week and $46 million in the same week a month ago. Notably, the Suezmax 5- and 10-year-old vessel value peaked to its 52-week high of $59.04 million and $38.21 million, respectively, in the week ending January 2, 2015. The four-week average stood at $45.73 million, compared to $33.49 million in the same period a year ago.

Vessel price appreciation

Tanker stocks such as Teekay Tankers (TNK), Tsakos Energy Navigation (TNP), Nordic American Tanker (NAT), and Frontline Ltd. (FRO) should continue to benefit from the year-over-year growth of weekly vessel values. Also, the Guggenheim Shipping ETF (SEA) is likely to see a positive impact.

 
Part 7
 
Falling crude prices: Crude indicators review (Part 7 of 8)

Crude oil prices slump, impacting crude tankers

Crude oil price

Rising oil production in the US is one of the major forces driving the oil price dip. In December, crude oil prices decreased to $57.33 from $72.94 in the beginning of the month. Plus, oil prices were down 45.6% from December 2013 levels. On January 9, 2015, crude oil prices closed at $50.11, down 51% from January 9, 2014, levels. Since June 2014, oil prices have declined 47.8% from $109.89. The slump in oil prices has sent significant ripples through the global economic and political scenarios.

 

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The lower oil price benefits companies like DHT Holdings (DHT), Teekay Tankers (TNK), Tsakos Energy Navigation (TNP), Nordic American Tanker (NAT), and Frontline Ltd. (FRO), as well as the Guggenheim Shipping ETF (SEA).

Recent Greece crisis

In January 7, 2015, trading, oil prices retreated below $50 per barrel. The future of Greece in the Eurozone ahead of the upcoming election in February is a little dicey. Greek elections could result in favor of the anti-austerity left-wing Syriza party, which threatens Greece’s commitment to the rescue package. This is causing concern for the shipping companies headquartered in Athens.

Investors’ fears escalated dramatically following the idea of a Greek exit from the Eurozone, even though that scenario is unlikely. Oil prices are expected to hold near the new lows in light of mounting concerns and caution dominating its performance.

Looking ahead

In its recent estimates, Goldman Sachs lowered its three-month price forecast for Brent to $42 per barrel from $80 in its previous forecast. Analysts set their forecast for US crude at $41 a barrel, down from $70. Analysts noted that it would need to stay near $40 for most of the first half of 2015 before it would hold up shale oil investments and create a balanced market.

Industry analysts believe that US crude oil production would be automatically curbed, since its break-even levels of $60 per barrel are not likely. The US would be forced to reduce its output levels, as OPEC expressed disagreement over a production cut after its Vienna meeting. This may lead to oil prices recovering from their all-time low levels.

Most expectations indicate that oil prices could see some moderation in the second half of 2015. This was affirmed by OPEC Secretary General Abdullah Al-Badri, who expressed hope for a price recovery. These expectations also correspond to OPEC forecasts, which anticipate improvement in prices in the second half of 2015, as well as the resulting market consolidation.