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Viewpoint: Jones Act fleet sails into 2018 oversupplied

27 Dec 2017 12:15 GMT
Viewpoint: Jones Act fleet sails into 2018 oversupplied

Houston, 27 December (Argus) — The US coastwise liquids shipping market, which is almost done absorbing a wave of new vessels sparked by the onshore production boom, does not appear close to freeing itself from overcapacity and rock-bottom rates.

Shipping rates on vessels covered by the Jones Act — those built and flagged in the US and crewed by its citizens that must be used to operate between domestic ports — have been on a steady slide since mid-2015, coinciding with a jump in Opec crude production that pummeled petroleum prices.

A rebound in crude and other markets has not lifted rates for liquid transportation equipment, and even a brief spike in some transportation prices spurred by disruptions from hurricanes Harvey and Irma on the US Gulf coast appears to have been temporary.

Adding insult to injury for Jones Act operators, a brief stay of US cabotage rules sliced into their business in September as shippers rushed to fill gaps in fuel supply.

"Although we initially witnessed the firming of spot rates in the wake of these two storms, it is reasonable to conclude that foreign vessels fixed under the Jones Act waiver took away cargoes that might have otherwise been fixed on some of our vessels," Sam Norton, chief executive of Jones Act-focused Overseas Shipholding Group (OSG), said last month a conference call.

Consequently, despite the storm and a brief surge in demand during the third quarter — albeit with unexpected competition from foreign flags — OSG saw time charter equivalent (TCE) earnings fall by 23pc from the same period of 2016. And because the company is more exposed to the spot market than any of its competitors, it is particularly sensitive to current rates compared with chief rival Kinder Morgan, which has said it prefers charter deals even if they mean heavy discounts.

Of OSG's 12 Jones Act tankers, nine were in the spot market as of September, with another on a two-year charter. Two ships, the Overseas Houston and Overseas Chinook, appear inactive according to the latest roster from the US Maritime Administration and vessel tracking services. Eight of OSG's nine oceangoing articulated tug barges (ATBs) appear active in the Atlantic basin, shipping both crude and refined products, and most are in the spot market.

The company recently pulled its OSG Navigator tug and barge from its ATB fleet, saying that the vessels are leaving the US Jones Act fleet, by scrapping or sale.

The average rate for OSG's ATB fleet in the third quarter was $17,848/d, almost half of the $33,876/d it reported in the year-prior period, which itself was about a year into this down cycle.

More ATBs entering service from orders placed during the industry's halcyon days continues to pressure the market for operators, Kirby said. The company has aggressively pared back utilization as rates skid along — it accounts for 15 of at least 30 registered ATBs from the latest MARAD roster that are inactive or retired according to vessel tracking services.