While market research in shipping is usually pre-occupied by analyses for tonnage supply and demand, events in complimentary industries to shipping often can have equally important implications.
For instance, in the pipeline industry in the North America, while Keystone XL planned pipeline to bring crude oil from Canada to the Gulf Coast run aground with regulatory concerns, the acquisition by Enbridge Inc. of a 50% stake in the Seaway Pipeline from ConocoPhillips, and the ensuing decision by the new owner to reverse the flow of the pipeline from Cushing, Oklahoma, to the Gulf Coast (Freeport, Texas), the impact to the tanker market cannot be ignored. It is still difficult to precisely quantify to impact to the shipping markets and pinpoint which asset classes in shipping will be affected most, but, based on current information, in Captain’s opinion, tanker vessels will negatively be impacted by the events while product tankers have the most to hope from.
As a very brief primer to the oil industry, the high quality West Texas Intermediate (WTI) oil usually trades at a premium to Brent oil; however, WTI is priced in landlocked Cushing, while Brent oil is the international (and mobile) benchmark for oil pricing. However, due to a drilling boom induced by the $150 / bbl pricing during the pre-crisis years and increased domestic oil production in the inland US and advanced hydraulic fracturing techniques, there has been a flooding of WTI oil in landlocked Cushing that could not meaningfully transported to refineries besides those in continental US. As a result, during the last two years, there has been the paradox of Brent oil trading at a premium to WTI, a premium that reached almost $28 / bbl in October.
The pipeline network in the US has mainly been intended to transport oil from south to north, primarily from the US Gulf Coast to Cushing and petroleum products mainly along the Atlantic Coast to the North / New York area. The reversal of the flow, of Seaway Pipeline from Cushing to the Gulf Coast, means that WTI oil can now be refined along the many refineries in the Texas / Louisiana region or pumped along the pipeline network to the North for processing. The Seaway Pipeline is planned to move about 150,000 bbl per diem by 2012 Q2 and 400,000 bbl per diem by the end of 2013 Q2. To put the quantities into perspective, in 2012 Q2, the cargo of one suezmax tanker per week will be supplemented by the reversal of the pipeline, and, in 2013 Q3, a VLCC cargo every four days will be substituted by the reversal. It has to be noted that crude oil cannot be exported from the US without onerous permits, and thus, the Cushing-originating oil cannot be exported and will end up processed in the US. Without getting into a fine-tuned analysis, it becomes obvious, that crude oil tankers will negatively be affected by the reversal, with, most likely, VLCC and suezmax tankers as the biggest targets of the impact.
Refineries in the US, in general, are geared to process lower quality oils, and that’s how they can maximize their margins. The ‘traditional’ output of the US refineries moves along the rule of thumb of 3-2-1, where a barrel of crude oil is refined to yield two-thirds of a barrel of gasoline and one-third of a barrel of distillate such as heating oil or diesel. However, with the Gulf Coast refineries now having access to cheap and high quality WTI, in order to maximize their margins, they likely will switch to 2-1-1 ratio, where one barrel of crude oil will now yield one-half of barrel of gasoline and one-half of barrel of distillate. The US is a big consumer of gasoline but always has excess capacity for distillates, especially for diesel. Europe, on the other hand, is an area where diesel is more widely used and always in need for additional capacity. Thus, most likely, refineries now will produce excess distillate that will end up in the export market, and most likely, product tankers stand to benefit from the switch. Since the cross-Atlantic petroleum products trade is dominated by the MR2 tanker market, MR2 tankers likely will be the asset class to benefit the most.
Who ever said that to understand and assess shipping one only has to focus on the shipping markets? The beauty of the shipping industry is not as magnificent and encompassing as the three-quarters of our planet that covers our planet, but also as elevated as the remaining one-quarter of lands where consumers live and dream. Some times their dreams are long as a pipe…unlike the dreams that keep the Captain company with a pipe in his mouth on the cold nights on the bridge…
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