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Viewpoint: Ship glut to hamper US-flag market

22 Dec 2017, 5.18 pm GMT

Viewpoint: Ship glut to hamper US-flag market

New York, 22 December (Argus) — Freight rates for ocean-going tankers and barges that carry oil between US ports could remain depressed in the next six months as the Jones Act market struggles to absorb the glut of tonnage on the water, although modest rate volatility may continue. Fresh vessel deliveries have come to a halt and potential spikes in cargo demand could tighten the shipping market for short periods of time.

"The spot market [for articulated tug barges (ATBs)] is flush with open tonnage from both owners, and from charter relets who are trying to minimize losses, with overcapacity showing no signs of narrowing", said Wells Fargo shipping analyst Michael Webber.

Rising US crude exports will continue to impact on the Jones Act markets as Texan oil cargoes increasingly move on international-flag vessels to buyers in Asia and Europe instead of on US-flag vessels to refiners along the Atlantic coast.

Ship oversupply

Highlighting the downward pressure that the ship glut has had on the market, ATB rates for major Jones Act operator Overseas Shipholding Group (OSG) fell 47pc year-on-year in the third quarter to $18,000/d. Wells Fargo forecasts that ATB rates will remain in the $18,000-$22,000/d range for next year.

There are about 60 ATBs with capacity of at least 140,000 bl serving the domestic oil trade and roughly 44 Jones Act-compliant medium-range (MR) tankers that can carry about 330,000 bl each. Over half of those tankers are employed in the oil product trade, many of which shuttle fuel from the Gulf coast to Florida.

While vessel supply will not significantly expand – no tankers are scheduled for delivery in 2018 after over four per year were delivered in 2015-2017 – in the near-term as journey demand will not be able to keep up with the existing glut.

"The marine market is oversupplied from a capacity point of view, and that is not something that turns around quickly", an executive from New York-listed Genesis Energy, a midstream oil company that operates one Jones Act tanker and a number of US barges, said in November.

Cross Gulf crude demand gains

Strengthening indications for crude cargo shipping demand between US ports may help absorb some excess tonnage capacity in the next six months.

Outbound crude shipments from the port of Corpus Christi, the dominant US port in terms of dirty cargo output, reached 682,000 b/d in October, the highest total since hitting the same mark in January 2015. The trend of elevated loadings in Corpus Christi should continue on the back of expected gains in US crude production, especially in the Permian basin.

While much of that volume will exit the US on international tankers pointed toward buyers in Canada, Asia, and Europe, there may be more opportunities for cargoes to move on Jones Act ships as long as the Brent-WTI spread continues to remain wide. Generally, the wider the spread gets the more attractive US crude is to refiners.

The elevated premium of Brent to WTI, which has hovered around $6/bl since late August, has already spurred demand for short-haul crude movements between US ports. "We are seeing more demand for crude transportation, manifesting itself in cross-Gulf movements, as opposed to upcoast movements", said OSG executive Sam Norton in November.

Upcoast crude movements on Jones Act tonnage have not bounced back from their 2014 high of roughly ten MR cargoes a month partially because elevated pipeline costs from Cushing to Houston have made the arbitrage unworkable for Atlantic coast refiners. Those refiners are importing foreign crude and railing in Bakken crude instead of shipping via the Jones Act market.

Through September, Atlantic coast refiners received the equivalent of only two MR cargoes of Texan crude per month on US-flag ships this year.

Modest spot rate volatility

Despite the overall tonnage overhang and strong competition from international tankers, there may be demand shocks in the coming next six months that lead to temporary Jones Act supply shortages, and allows operators to demand higher freight rates in the spot market.

"We consider the market to be tighter than what it appears on a static analysis, as was illustrated by the sharp market moves experienced during the past hurricane season", said the OSG executive.

Increased demand for Jones Act tonnage loading in the upper Atlantic coast following the late-summer hurricanes in the Gulf of Mexico amid fuel shortfalls in Florida helped some operators to boost voyage charter rates.

In some cases, the gains since the hurricanes have been sustained on the back of steady demand for domestic oil movements.

The Houston-Port Everglades clean ATB rate has rebounded 28pc from a four-year low of $1.60/bl in August to $2.05/bl currently, according to Argus figures. Although this rate is less than half of levels seen two years ago, it is still higher than current international tanker freight costs inbound to roughly the same region despite longer traveling distances. The cost of clean tanker freight into the US Atlantic coast has averaged $1.78/bl from Europe, $1.13/bl from the Caribbean, and 95¢/bl from east coast Canada this year, according to Argus data.

Like ATB rates, spot rates for Jones Act MRs have risen recently as well, with fixtures heard in the $50,000-$60,000/d range in December, compared with levels slightly above $40,000/d in previous months.

The bump in rates has not necessarily translated into higher revenues for Jones Act operators, whose ships are generally fixed on time charters with static earnings or have otherwise not been available for those cargoes with elevated earning potential.

And despite these recent spot rate increases, the overall ship capacity glut in the US market and strong competition from international tankers for shipments into the Atlantic coast will likely limit further Jones Act rate gains in the next six months.

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