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Suezmaxes trading into the US set for a boost?

Suezmaxes trading into the US set for a boost?
The recent earnings report of Nordic American Tankers (NAT), a suezmax pure play, shows the interplay of the commodity markets with the tanker trades, and the refractions of the stock analysts lenses. NAT vessels trade mainly spot; with low debt, and therefore incremental cashflows being seen directly at the bottomline, its ebbs and flows reflect perceptions of the marketplace for million barrel tankers.

In Q2, these types of vessels got a big bump upwards as suezmaxes loading in West Africa were pulled out to Asian destinations. Whether the strength continues is a matter of conjecture.   

Energy boffins point out that PADD 1 (the US East Coast) imports of both crude oil and products have declined precipitously in the past two years, explained, at least partly, by the relative expensiveness of Brent-priced crude oil imported into the US In February 2013 with Brent crude at around $120/ per barrel, the spread stood at $23 per barrel. But, then, the premium of Brent over WTI began to shrink; a main reason is US oil production, including from newly producing shale fields, getting to the coasts via pipeline and rail, as infrastructure bottlenecks seemed to clear up.

What is coming up in Q3, where we are now, and Q4 should be interesting. Tanker brokers Poten & Partners, describing July’s renewed burst of suezmax actitivity, said: “Barrels that would have otherwise moved East on VLCCs suddenly found homes in the UK Continent, Mediterranean and US.” Poten cites 95 spot West Africa fixtures in July, versus an average of 60 per month over the past year and a half.

Last week, NAT announced its Q2 earnings; it lost almost $29m, coming in -$0.48/share. In its commentary, NAT hints at likely improvements coming up, saying: “The closing of the price gap between WTI (oil produced in the US) and Brent crude (non-US production) tends to stimulate US oil imports and is an example of how tanker market dynamics may change unexpectedly.”

In the meantime, Poten is very cautious about a rosy suexmax future going forward. Likewise, the stock analysts who follow NAT are also sceptical of improvements that are not already factored into the stock price, presently at  $8.39/share, despite a run of losing quarters. One analyst, Sam Margolin, at Cowen Securities, posited: “We do not see upside beyond current rate levels given uncertainty over global oil demand, greater than 10% orderbook/fleet for suezmax tankers, and the downward sloping trend of North American crude imports. Spread compression has opened the door for imports, particularly on the suezmax-dominated WAF/USAC route, but we view this as a one-time opportunity…” Other analysts waxed similarly about waning prospects for NAT.

But shipping requires a longer term view to capture its own boom/ bust cycle, but also the cycles in the underlying cargo businesses. Much like a commodity chart, US data shows that monthly imports hit “support” (ie a floor) at around 20m barrels of crude oil during a particular month- then they bounce upward. By July, products and crude combined hit a floor at 60 million barrels during a month. Could they bounce upward?

At the risk of sailing into the wind, NAT may have been bashed unfairly, or, at the very least, it may certainly be underappreciated. Looking at the long-term graph, the situation for East Coast imports may boost the fortunes of the suezmaxes bringing crude into the US. And assuming that the contrarian view holds, with more vessels drawn into these Atlantic trades, there may be some upward pressure on other million barrel trades.


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