A Firm US Gulf Story
July 22, 2022
The Atlantic Basin market has again become the main driver of the bullish sentiment this past week, especially for VLCCs. According to our proprietary commercial fixture tracking, we counted a total of 21 Eastbound VLCC cargoes and 10 loadings to Europe in the month of July, significantly higher than 16 Eastbound and 6 Europe-bound cargoes a month ago. The active VLCC fixings in the US Gulf pushed rates higher for both Eastbound and Europe-bound routes. The benchmark TD22 (VLCC USG/China) freight rates opened the week at US $7.2 million and now reported last done at US $7.45 million. The question now becomes whether the current momentum could continue for the rest of 2022.
To answer this question, we have built a statistical model using US crude production, refinery demand, inventory changes and crude imports to provide us insights on US crude balances and export volume.
The first step is to measure domestic crude demand and the production level. The strong oil product demand in the US during the summer driving season has significantly boosted the refining margin. As a result, crude demand in major refineries has seen strong throughput volume (15.8 mil b/d) in the 1H of 2022 and likely to be carried over into the 2nd half (est. 16.0 mil b/d). However, the incremental growth on the demand side is unparallel compared to the US crude production. The high global crude prices have incentivized a rapid increase in shale oil production, up from 11.7 mil b/d in the first six months of 2022 to a projected 12.3 mil b/d.
In the meantime, with US Department of Energy (DOE) selling 180 million barrels of Strategic Petroleum Reserve (SPR) in a six-month period, the approximately 1 million b/d of crude released to the market could further extend US crude balance. These crude barrels, combined with a stabilized crude import from foreign countries, signals continued strength in crude export volume heading into the winter.
Our model indeed validated this thinking process, as a very strong correlation has been found between the net US crude balance (production + imports + inventory changes – refinery Demand) and US crude export volume. The quarterly averages for US exports are pointing to further gain in the 3rd and 4th quarter particularly to Europe to offset Russian supply, from an average of 3.36 mil b/d in the 1H to 3.45 mil b/d in Q3 and 3.79 mil b/d in Q4 2022. It is worthwhile to note, however, the recent news has revealed criticism and challenges from the House Republicans on selling SPR to major Asian consumers. With mid-term election approaching in November, the Eastbound export volume could face some potential downward risks.
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