Viewpoint: Jones Act market eyes WTI for 2019

Rising US oil output from the Gulf coast and limited domestic pipeline capacity may absorb the abundance of US-flag shipping capacity delivered from shipyards in 2015-2017.

The appetite for Gulf coast crude among Atlantic coast refiners, especially near Philadelphia, will be the key determining factor in whether or not the recovery extends or recedes for the 93 tanker- and barge-strong Jones Act market.

"The market is getting better […] but it is fragile. It is dependent to a large extent on the Brent-WTI spread," an executive at Moran Shipping, a Jones Act barge operator, told Argus.

The Brent-WTI spread is a very strong indicator for upcoast crude flows on Jones Act tonnage, even though the spread does not take into account volatile pipeline costs for transporting US crude to the coast.

In January-June 2018, the Brent-WTI spread averaged $5.82/bl and an average of 93,000 b/d of US crude flowed to the US Atlantic coast, according to data from the US Energy Information Administration (EIA). For comparison, in the same period in 2017, the spread was $2.55/bl, and only an average of 16,000 b/d was transported along the route. For context, that difference in crude flows in those time periods is equivalent to seven more medium-range (MR) Jones Act tanker movements per month.

"There are a lot of ton-miles going into the Philadelphia trade; without it there is still slack [in the Jones Act market]," said the Moran executive.

Growing US production of light, sweet crude should put downward pressure on the WTI benchmark relative to Brent, and may keep the spread wide in 2019. Sam Norton, chief executive at major Jones Act operator Overseas Shipholding Group (OSG), said in November 2018 that he expects the arbitrage to ship US crude to US refineries by boat to be open "more often than not" through 2019. US oil production set a record of 11.5mn b/d in September this year, according to the EIA.

On the clean side, steady demand in pipeline-starved Florida will drive marine gasoline shipments from the Gulf coast, where refining output reached record highs this year. Demand on the longer-haul US Gulf coast-northeast route, another key clean Jones Act route, will be strong if the winter is long and cold because the region relies largely on distillate fuel for heating. Already, a combination of fuel inventory build-up in the region and a November snow storm has led to at least six Jones Act shipments, averaging 200,000 bl, on the route for November and December loading.

Jones Act spot rates have gradually risen since the troughs of 2016-2017 on the back of a combination of increasing demand and steady tanker and barge supply. In January-June of 2018, the average Corpus Christi-Delaware Bay, Pennsylvania crude tanker rate rose year-over-year by 31pc to $3.81/bl, and the average Houston-Port Everglades, Florida articulated tug barge (ATB) rate firmed by 35pc to $2.52/bl, according to Argus numbers. This firming trend could continue into the first half of 2019 as long as Gulf coast crude remains competitive among east coast refiners, and especially if a cold winter in the northeast boosts heating oil movements from the Gulf coast.

The Jones Act is a long-standing piece of US legislation that requires all shipments between US ports to be conducted on US-build, US-crewed, and US-flagged vessels.