Day of Reckoning- stranded oil, widening spreads and IFO

Moderated by economist Ed Morse, who heads up Citigroup’s commodity research, speakers John Auers, evp of consultant Turner, Mason Company (TMC) and Lucian Pugliaresi of the Energy Policy Research Foundation, presented a panoply of economic and political perspectives on the knotty questions of future exports of US oil. Auers, whose background includes work at ExxonMobil, talked at length about the potential- in the absence of allowed oil exports, for what he called “stranded oil”.

Simply put, there would be more “light” oil than the US refining system could handle, if shale oil production continues to grow, but export restrictions are not lifted. In one scenario presented by Auers, “…the discounts would blow out…” as US produced light crude is severely discounted to worldwide Brent prices. Pugliarese offered a suggestion that US shale oil production could expand by a further 2.5m barrels per (bpd) day by 2020, over the present 3m bpd.

Tanker trades have already seen impacts of increased production of crudes in North America- including less movement of crudes into the refineries in Texas and Louisiana. The prohibitions on exports of the crude oil itself, the subsequent exports of refined products, have already been important influencers on the worldwide tanker market. Indeed, reduced suezmax imports from West Africa into the US East Coast set the stage for a burst of suezmax cargo moving out to the Far East- and driving up suezmax rates as high as $75,000 per day time charter equivalent.

Auers remarks also touched on another important possibility that could impact VLCCs, a situation where Saudi Arabia, part owner of the Motiva refineries in Texas and Louisiana, might reduce, or eliminate shipments of Arabian light into the US Gulf. Such an action, with the Saudi’s potentially selling their oil more profitably into Asian markets, would have the impact of at least reducing the looming light oil surplus. US exports of LPG, which Pugiarese discussed at length, are likely to soar as price dramatic price differentials make US.

Though not explicitly part of the discussion, there are potentially positive implications for the shipping fuel markets; present regulations call for a close look at the availability of low sulfur fuel, to be conducted in 2018. Consider that if one scenario envisaged by Auers- a growing supply of middle distillates, as more light crude oil is processed, possibly in “hydro-skimmers” and then run through desulfurisation units, could provide an increased supply of diesel, for consumption in medium speed engines, or, perhaps, to be blended into Intermediate Fuel Oil (IFO). This is one of many possibilities.

Exports of US crude to Canada are permissible, if the oil is used in Canada. TMC’s presentation data suggest that exports to Canada, which reached 200,000 bpd, could grow to 700,000 bpd by 2018- in an optimistic scenario.

As an aside, I attended a Working Waterfront event the next night; a senior pilot told me that “…another tanker will be starting to load regularly at Albany…” referring to movements of Bakken crude that move to Canada. Maybe the second ice classed Tsakos vessel, a sister to the Afrodite, chartered, last year, to Irving Oil?

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