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Oil, shipping and the commodities collapse

Oil, shipping and the commodities collapse

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While the world is awash with speculation on what will happen to Greece, the Euro and the Chinese economy, a related debate is taking place within the United States. The export of crude oil and most natural gas, and the fight that never ends over trade liberalisation are growing political and economic issues in the US. Oil prices entered a new bare market last week, with Brent crude dropping below $57 a barrel. The oil price drop is part of a wider decline in commodity prices that has followed the end of the great China boom.

If anyone doubted that politics often drive the fate of shipping, the battle over US oil and gas restrictions must be a classic case. Logic would seem to indicate with the decline in oil prices, and demand for petroleum, gas and distillates in Europe and Asia, that this is not the best time to secure US government approval for relaxation of export restrictions. Or so one would think.

Not that there aren’t many advocates of allowing US – and, shhh – foreign-flag tankers to carry crude overseas. This peculiarly American debate revolves around entry of US oil into the global market, for the first time since the early 1950s. Strategic thinkers, of whom there is no shortage inside the Washington Beltway, and in Houston, argue that our key Asian allies, mainly Japan, Taiwan and South Korea, remain heavily dependent on energy imports from the Middle East, which pass through the strategic chokepoints of the straits of Hormuz and Malacca.

On the other side of the barricades, a number of US senators sent a letter to President Obama last month, warning that the lifting of the ban on exports of crude oil could “harm businesses, consumers, and our national security”.

The truth is that a significant amount of US crude and processed condensate is getting past the paper blockade of US prohibition. Although the ban, so-called, has been on the US statute book for 40 years and counting, exports of US processed condensate and deliveries of US crude to Canada have been rising quite steeply. The price of US crude has been quite strong against global grades, undermining the contention that export restrictions have trapped domestic supplies, and forced producers to accept deep discounts in price.

At the beginning of July, the spot price of Light Louisiana Sweet crude on the US Gulf of Mexico coast was $61 per barrel – more than the Dated North Sea Brent price of $59.09. The divergents in price of West Texas Intermediate crude delivered at Cushing, Oklahoma, recently shrank to as little as $3 a barrel, compared to Brent. The narrow difference between US and international oil prices is the result of the porosity of the ban on exports, and the Obama administration’s prior policy zigs, zags and nudges, within the restraints of the law. The US allows crude oil exports to Canada by companies enjoying a licence; as of April, oil exports to Canada had grown to a record 492,000 barrels per day, a tenfold expansion from four years ago.

In addition, there is no ban on refined fuel exports, and US refiners have responded by processing more oil, and pumping out fuel for sale domestically and abroad.

Most of this export trade – the part that is not being carried to Canada in railroad tank cars – is moving (you guessed it) in foreign-flag tanker vessels. After all, there are very few US-flag tankers in existence. This is why representatives, ie, lobbyists, are watching future government policies quite closely.

Last year, the Obama administration went further, permitting exports of a kind of ultralight oil called condensate, as though it had been processed through an oil refinery. Under the former government rulebook, this condensate had to be processed through ‘splitters’, or blended with crude sold to refineries, driving down the price of both condensate and crude. Exports from the US of processed condensate reached 126,000 barrels per day in June, up from zero 12 months before.

While these facts have tended to cram down, if not silenced, the price argument for lifting the ban on crude, the fact remains that additional sources of oil production are coming on line in the US. A supply glut is occurring, which pushes down the price of US crude oil that, at least, is the principal argument. Of course, tankers and their operators would be delighted to see the ban lifted, so that they could lift cargoes to Asia and Europe, or at least become floating storage facilities – a sort of US contango.

It is highly unlikely that export policy will change, at least until a new administration takes office in Washington. There is a real determination in Congress that rising exports could be followed by a rise in gasoline prices at the pump, for which someone would certainly be blamed. And, the narrowing spread of the Brent – West Texas Intermediate price indicates that “do nothing” is an acceptable policy to which the Domestic Energy Producers Alliance replies that maintaining the ban is a restraint on the hydraulic fracturing boom, and will when the boom ends, make the US more dependent on foreign oil. That’s one argument.

Against that, and the desire of tanker owners for more cargo, the US Energy Information Administration has forecasted a growth of more than 1m barrels per day between now and 2018. This could depress US prices even more.

As of last month, moreover, crude inventories in northwestern Europe were at 61m barrels, which argues against a rise in demand. More US production could depress prices even further. The world is not crying for US oil. To add to an oversupply of oil in Europe could drive the price of Brent further than it would drive up West Texas.

All of this back-and-forth reflects a world that suddenly has more oil than it has had in many years. It’s too soon to call it an oversupply, but it certainly raises questions about why all those new tankers are on order, in the face of a demand that, at least in the US and Europe is not likely to rise very much in the next few years.

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Clay Maitland

Clay Maitland has worked in the shipping industry since graduation from law school in 1968. Clay has been employed by International Registries, Inc. for 39 years and is now a managing partner of the company, which administers the Marshall Islands Ship Registry – the third largest registry in the world. He is President of the Trust Company of the Marshall Islands (TCMI), the statutory Maritime Administrator of the Republic of the Marshall Islands. Prior to the year 2000, Clay held similar positions with regard to the maritime administration of the Republic of Liberia.

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2 Comments

  1. Barry Parker
    July 14, 2015 at 2:00 pm

    I am most interested in the US oil contango- not sure I agree but there are some interesting questions. As you state in the article, US oil exports, net net, would tighten up the spreads between US grades (would move higher) and Brent. However, this would not comport with the contango idea- which would require extreme discounts at the nearby end of the forward curve. US producers favor exports exactly because they fear an overabundance of light sweet oil (most produced from shale). If we are in for production cuts, say early next year, as some wags are suggesting, this would also keep upward price pressure on the US grades- particularly at the nearby end of the forward curve.

    However, let’s say US oil contango were to happen. I’d be interested in the legalities of how this would work with non Jones Act (ie foreign flag) tankers, presumably in LR category, large Aframaxes, small Suezmaxes. Would load oil at Corpus Christi area, and then….. are such vessels then allowed to discharge in the U.S.? Or would they then discharge foreign but with some time lag- anchoring involved? If the tankers don’t go outside of US 200 mile zone, can they come back, after some time lag, and discharge at SAME US port where the oil had been loaded- not sure what’s considered a “voyage”? Or are you contemplating storage on US Jones Act tankers?

  2. Sam Chambers
    Sam Chambers
    July 16, 2015 at 7:44 am

    Barry, see Clay’s latest Opinion piece, published today where he touches upon some of the points you have raised