The oil demand baton has been passed
Over the past decade, global oil demand from non-OECD (Organization for Economic Co-operation and Development) countries has grown significantly faster than, and recently surpassed that of, OECD countries. This is significant as the average voyage distance for a crude oil tanker to non-OECD countries is typically longer than to OECD countries. We expect this will result in increased demand for oil tankers and put upward pressure on day-rates as supply is tied up for longer periods on the water.
Source: Wall Street commodity research
Historically, the US has been the largest global source of ton-demand for crude, but the significant increase in domestic production from shale oil has resulted in the decrease of US seaborne oil imports, which largely come from West Africa. West African crude exports are finding a new home in Asia/China, but this significantly increases the voyage distance from about 5,000 miles over 19 days to about 9,650 miles over 33 days.
Refinery expansions in the Middle East are leading to increased sourcing of domestic crude oil, which reduces the amount available for export. As a result, China is buying less oil from the Arabian Gulf and more from Latin America and West Africa. This changes the voyage distance of about 5,500 miles over 21 days to about 11,500 miles over 44 days and 9,650 miles over 33 days, respectively.
Structural expansion: Increased ton miles given trade shifts
Significant supply is unlikely until 2017
The global order-book for Very Large Crude Carriers (VLCCs), Suezmax oil tankers, and Aframax oil tankers, as a percentage of the current global fleet, is the lowest it has been since the late 1990s. More ships will ultimately be built, but a significant supply increase is unlikely until 2017 as shipyard capacity at the highest quality yards has been absorbed by orders for Liquefied Natural Gas (LNG) vessels, containership vessels, and Very Large Gas Carriers (VLGCs).
Source: Global Hunter Securities
We believe the combination of low oil prices driving increased demand, a structural change toward longer voyage distances keeping vessel utilization at elevated levels, and an oil tanker order-book that is at its lowest level in 10-plus years should result in persistently higher day-rates. While this favorable market dynamic will ultimately be curtailed as supply will inevitably hit the market, we believe there is an opportunity for growth investors in select oil tanker companies with high spot market exposure.
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