Atlantic Basin crude trade to the East

Apr 29 2016

For many years, the tanker industry benefited from strong increases in Atlantic Basin crude trades to the East.

Several reasons were behind this growth. For example, significant gains in US crude production earlier this decade reduced US appetite for imports.

Trade from West Africa was hit the hardest, allowing for more crude being shipped not only to Europe, which had suffered from the loss of Libyan barrels, but also long haul to Asia, Gibson said in a recent report.

In addition, there were significant gains in trade from Latin/South America to the East on the back of growing regional production and falling US imports of Latin American barrels.

However, the dynamics of the market are changing. The collapse in oil prices reversed the stellar growth in US output, which had started to decline since May, 2015, with the downward trend showing no signs of abating at the time of writing. Furthermore, at the end of last year, US authorities repealed the decades old crude oil export ban.

Although short term prospects for international exports are likely to be limited, declining production suggests a greater US need for imports. To some extent, we are already seeing signs of this, as after years of decline, US crude imports remained flat in 2015 versus 2014, averaging 7.7 mill barrels per day and this year’s EIA preliminary weekly estimates suggest that crude trade into the US has started to rise.

Total imports have averaged around 7.8 mill barrels per day since January, up by around 0.5 mill barrels per day, compared to the same period in 2015, with stronger imports from the key Middle East and West African producers.

Rising westbound shipments from the Middle East undoubtedly support tanker demand, but can the same be said for volumes from West Africa? The combined Angolan and Nigerian crude production remained generally flat in 1Q16 relative to last year’s average. This means that increases in crude shipments from the region to US reduced the volume being transported westbound to Europe and/or long haul to the East.

The picture is similar going forward, as only marginal changes are expected in Angolan and Nigerian sustainable crude production in the medium term.

Thus, any potential growth in trade to the US could impact negatively on shipments to Asia, if European bound volumes remain unchanged. On this basis, the prospects for long haul movements are closely linked to developments in Libya, as the recovery in North African crude production is likely to free up more West African barrels for eastbound shipments.

However, considering the great degree of political instability in Libya, this seems unlikely to happen any time soon. The prospects for crude trade from Latin America to Asia are also more uncertain, as the ongoing weakness in US domestic output could stimulate stronger imports of Latin American crude, restricting long haul shipments to the East.

The dynamics of the market are likely to change once again when the oil price firms, aiding the recovery in US domestic output. However, even then expanding refining capacity in Latin/South America represents another threat to regional exports.

According to the IEA, around 0.55 mill barrels per day of new refining capacity is expected to come on stream between 2018 and 2021. In order for long haul crude trade to the East to continue to increase, the future gains in Latin American crude production needs to outpace the growth in refining capacity additions, Gibson concluded.  

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