Viewpoint: Jones Act rates to rise on hamstrung supply
A steadily rising flow of oil from the US Gulf coast to the US Atlantic coast is likely to push freight rates higher for a fourth consecutive year in a Jones Act market whose tanker and barge supply is increasingly constrained.
No additional tonnage will be added to the Jones Act ocean-going market in 2020 with the exception of two barges that shipowner Overseas Shipholding Group (OSG) will use to replace two aging ones, David St Amand of Navigistics Consulting said.
The average rate in December for clean medium range (MR) tankers on the Houston-New York route rose by 5pc to $4.31/bl from a year prior, the third year of consecutive gains, according to Argus assessments, as demand has outstripped supply in that period.
Rates are likely to keep rising in 2020 as supply-demand fundamentals are poised to tighten further.
Sufficiently wide arbitrages for shipments from the oil-saturated US Gulf coast to the oil-thirsty US Atlantic coast are expected to continue to keep the 88 vessels of the Jones Act tanker and barge fleet busy next year.
Discounts for rising Permian crude production, despite recent plateauing of output, to imported supply into US northeast refiners will continue to support upcoast Jones Act cargo movements. OSG, the operator of 21 US-flagged tankers and barges, said in November that discounts of more than $2/bl for West Texas Intermediate (WTI) Houston crude to Bonny Light, a west African crude grade similar to WTI, supports shipping demand on the route. The price spread averaged $4.15/bl from May to November and is expected to remain generally favorable, said OSG. Unlike with refined products, there is no crude pipeline that connects US Gulf coast supply to US Atlantic coast demand, making marine transportation the best option available to traders.
Domestic marine shipments of refined products to Florida are also on the rise. The route is key for Jones Act demand because Florida has no refineries or pipeline connection to the US Gulf coast refining center.
Petroleum product shipments by tanker or barge from the US Gulf coast to the lower Atlantic, primarily Florida, this year through September have risen by 5pc to 725,000 b/d compared with a year earlier, according to the US Energy Information Administration.
St Amand expects the trend of increasing volumes on this route to continue next year, barring any gasoline price spike that could dampen Florida's demand for the product.
Hamstrung shipping capacity
In addition to the lack of future Jones Act fleet growth, existing operational capacity of Jones Act tonnage is under pressure.
The continued absence of barges operated by US shipping company Bouchard, whose compliance issues this year have caused the company to suspend its fleet's operations, will help keep the Jones Act market tight. The company did not respond to a request for comment.
Bouchard's suspension followed a 9 May US National Transportation Safety Board report blaming a fatal 2017 barge explosion on the company's "lack of maintenance and safety management."
Bouchard owns 25 barges ranging from 35,000 bl to 260,000 bl capacity, according to its website.
Constrained shipbuilding capacity and high construction costs are two factors limiting forward fleet growth. Only two shipyards, Philly Shipyard and San Diego-based Nassco, are capable of building Jones Act-compliant tankers and such tankers cost approximately five times that of one built in an Asian shipyard.
The Jones Act is a longstanding US law that requires shipments between two US ports to be conducted on US-flagged, US-built, and US-crewed ships.
By Nicholas Watt
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