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Jones Act market recovery drives term charters: OSG

09 Mar 2018 19:27 GMT
Jones Act market recovery drives term charters: OSG

New York, 9 March (Argus) — Major Jones Act-vessel operator Overseas Shipholding Group (OSG) said the US-flag maritime oil shipping market is in the midst of a recovery because of strengthening coastwise domestic crude transportation demand, episodic spikes in refined product freight demand, and reduced fleet capacity in an earnings call today.

"We are confident that we have seen the bottom of our spot and time charter market", said chief executive Sam Norton. Expectations of increased shale production will continue to make US Gulf coast crude a more cost-effective option for US refiners, located along both the Gulf and Atlantic coasts, providing further support to the Jones Act market recovery.

Time charter equivalent (TCE) rates for medium-range (MR) tankers, of which there are about 44 in the US-flag fleet, rose from about $35,000/d in the summer of last year to over $60,000/d by the end of February of this year, according to OSG data.

Elevated ship deliveries in 2015-2017 and demand reductions, partially as a result of the US federal government decision to lift the crude export ban over two years ago, created a surplus of available ships.

Increased demand for US Gulf coast to US Atlantic coast crude movements has been driven by "a persistent discount of domestic prices to international prices" and has absorbed excess shipping supply, said the company.

Although the Brent-WTI spread is the standard gauge for judging the competitiveness of US crude to US refiners, the spread between WTI Houston and Nigeria's Bonny Light has proved more useful for analyzing Jones Act demand, the company said. WTI alone, which is priced basis Cushing delivery, does not take into account pipeline transportation costs down to the coast, and Bonny Light, as a light, sweet grade of crude, competes directly with US crude among US refiners.

On the clean demand side, weather and other types of disruptions have continued to lead to shortfalls in refined product in some parts of the country, sparking demand for ship movements, the company said. The lack of storage capacity along the Colonial and Plantation pipeline systems has further increased demand for clean vessels.

On the supply side, the removal of older tonnage, partially due to more stringent age-limit requirements by terminal operators and oil companies, has further tightening the shipping market, Norton said. Two of OSG's older barges exited the market in the second half of 2017, along with four large barges and one tanker from other operators. Further reductions in the fleet size are "highly likely" in the remainder of 2018, said Norton.

While spot tanker rates have risen recently, OSG's exposure to the spot market – it is a counterparty to over 75pc of recent spot fixtures – remains a "transitional condition" and the company has maintained its preference for long-term charters.

The company has already fixed one of its tankers for an 18-month charter in the last quarter, and has offers approaching $60,000/d to fix three more tankers that are available.

OSG's fleet consists of nine tankers, three shuttle tankers, six articulated tug barges (ATBs), two lightering ATBs, and two tankers that are chartered out under the US Maritime Security Program (MSP).