by Julian Lee (Bloomberg) – Supertankers hauling seawater across the Atlantic? That’s just one of the odder results of the U.S. shale boom.
Crude oil has always flowed backwards and forwards across the world’s oceans. A typical voyage by one of the global fleet of around 750 of the giant ships currently in service might see it haul Middle Eastern exports across the Atlantic to a refinery on the U.S. Gulf coast, then pick up a cargo from Venezuela for delivery to China or India, before returning to the Persian Gulf.
Vessels only earn money when they’re full, so being able to haul cargoes in both directions across the seas makes a great deal of sense for ship owners. But soaring U.S. production, OPEC output cuts and sanctions on Iran and Venezuela are turning the global crude oil trade on its head.
This is making it more challenging to find cargoes to haul both ways. The result is a procession of empty supertankers making voyages of as much as 21,000 miles to the U.S. direct from Asia, all the way around South Africa, holding nothing but seawater for stability.
This doesn’t look like a one-time affair. Probably the only way vessels can return to the glory days of two-way loads is if the Saudis backpeddle from their planned output reduction. And that’s not likely to happen anytime soon.
The good times started at the end of 2015, when then-President Barack Obama lifted a 40-year ban on U.S. crude oil exports (one policy that President Donald Trump hasn’t sought to reverse) and set in motion a wave of shipments that has since soared to a record 3.6 million barrels a day in the week to Feb. 15. That was more than the average January exports of every OPEC member except Saudi Arabia and Iraq.
Add to this a pickup in the flow of oil out of the Caribbean – Venezuela is shipping more of its crude east now that U.S. sanctions prevent it from targeting its traditional buyers on the Gulf coast.
All that hauling needs ships.
Initially, rising U.S. exports were a boon to vessel owners, who found a nice profit boost in the growing market for their tankers, which had previously been forced to travel empty on the journey east as they departed America, across the Atlantic to the Middle East.
But now, the volume of crude being shipped westwards across the ocean has dropped significantly.
First to be hit was the flow of light, sweet crude (the stuff that contains lots of small hydrocarbon molecules that are easily turned into products like gasoline — hence, light — and very little sulfur — hence, sweet) from Nigeria, which was replaced in American refineries by domestically produced light tight oil from shale.
The U.S. has fewer direct domestic substitutes for the heavier, sourer crude grades that it has traditionally imported from the Middle East. But rising flows from Canada and the processing of more domestic light, sweet crude in American refineries have undermined this trade, too. OPEC’s latest output reductions, which started in 2017 and were revised with effect from last month, have hit this further.
Saudi Arabia’s decision to focus its production cuts on the American market are feeding the drop in exports to the U.S. from the Persian Gulf. The keenly watched weekly data from the Energy Information Administration mean that falling shipments to the U.S. will show up much more quickly than a similar cut in exports to China or India, who are much less forthcoming with oil import information.
Shipments from the four Persian Gulf OPEC countries that regularly export to the U.S. — Saudi Arabia, Iraq, the U.A.E. and Kuwait — totaled less than 900,000 barrels a day last month, according to Bloomberg tanker tracking. That is around half the level they were when the output cuts began. Add in the declines from OPEC’s West African producers, Nigeria and Angola, and the drop in the trans-Atlantic crude flow is even more dramatic, down by nearly 70 percent since 2013.
As U.S. crude exports continue to grow and OPEC shipments in the opposite direction remain constrained, the recent trend of cargo ships having to make key legs of their journeys empty is going to continue. Ship owners are hoping that U.S. exports will expand enough to offset the slump in OPEC flows, even if it means send empty tankers across the Atlantic to pick up those cargoes.
Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.