The Small Surprises in the US Crude Export Market
June 26, 2020
There have been too many “surprises” in 2020 with the world spinning to the rhythm of a pandemic and major geopolitical shifts. This week we are looking deeper into the US market and some unexpected developments in the US crude export market.
We have seen that the combination of a huge drop in domestic demand with the low oil prices and the deep cuts from OPEC+ have all played a role in crude exports from the country to not suffer as much as initially expected. According to the latest data from the Energy Information Administration (EIA), total US crude exports in 2020 went from a peak of 3.7 million b/d in February to a low of approximately 3.1 million b/d in April. For May the same data so far shows a slight increase at almost 3.37 million b/d. Despite this resilience, the road ahead may be bumpy. The reason is that while US producers are looking into ramping up production, we know that demand on the refinery level is bound to move upwards much quicker. For that reason, we believe that refiners in the US are likely to absorb the domestic product before production catches up thus pushing crude exports down -at least for the short term, beginning in the second half of 2020.
Along with the somewhat peculiar development in the US crude export market, we have observed an uncommon behavior regarding the preferred ships to accommodate those exports from the US Gulf. Given the long voyages for US crudes, it is traditionally more economical to ship barrels on a VLCC that benefits from its scale. However, in the past few weeks we have observed Suezmaxes to become a cheaper option on a per ton basis. On the week of June 7th, the US $/mt for VLCCs stood at about US $28 and at US $22 for Suezmaxes, excluding lighterage costs (Figure 1). For that reason, we immediately saw more Suezmaxes getting fixed for East voyages, supported by very weak activity in Europe and storage drawdowns in West Africa, something that pushed more ships to ballast to the US Gulf thus increasing the list.
To tie everything together, the combination of an expected drop of exports beginning in July and weakening VLCC activity in the AG, West Africa and Brazil due to storage drawdowns is expected to bring the large vessels back in the Gulf. We already see the VLCC sector to regain its more “economical” status and we expect most cargoes going forward to be loaded on them instead of Suezmax tonnage. All these unconventional and unexpected developments serve as a good reminder that world markets are still far from balanced and surprises are to be expected in every step forward.
Figure 1 – VLCC & Suezmax USG Fixtures and Freight Cost
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