Oil shippers' boost from wider crude spread seen short-lived
Sept 13 (Reuters) - Gains from ferrying more West African crude to the U.S. East Coast are proving limited for oil tanker operators such as Nordic American Tankers Ltd, even as some refiners consider processing more foreign crude in place of domestic oil.
The price gap between U.S. benchmark West Texas Intermediate (WTI) and European benchmark Brent crude has begun to widen again after leveling out in July for the first time since 2010. On Friday, a barrel of Brent was about $4 more expensive than a barrel of U.S. crude.
Nordic American benefited from a slight upswing in chartering activity in July and August due to a narrow spread, Chief Executive Herbjorn Hansson said. But he said the market started to weaken towards the end of August.
The company's shares have lost 17 percent over the past month, underscoring investor reluctance to put money on the shipping sector.
"Shipping stocks have been very volatile, so while investing in shipping may provide an attractive upside opportunity, investors should be very cautious," said William Belden, a managing director at Guggenheim Investments.
The fund's shipping ETF includes tanker stocks such as Nordic American, Teekay Tankers Ltd and Knightsbridge Tankers Ltd.
Anders Wennberg, a portfolio manager at Stockholm-based Brummer & Partners, which owns shares in Frontline Ltd, said most of the benefit from the temporary spike in charter activity was already priced into tanker stocks.
The market for Suezmaxes, the most common vessel type used to move oil to the United States from West Africa, has begun to weaken due to the widening crude gap and competition from other vessels.
Owners of very large crude carriers, which primarily operate out of the Middle East and the Arabian Gulf, are altering routes to carry West African crude and take advantage of new demand.
"It is cheaper to import than to buy piped crude in the U.S.," said Frontline Chief Executive Jens Jensen, adding that this had been of benefit to the VLCC, or very large crude carriers, market.
Frontline, the tanker arm of shipping tycoon John Fredriksen's business empire, operates 32 VLCCs - a tanker the length of three football fields.
But an increase in charters for VLCCs, which are cheaper on a per-barrel basis, are chipping away at Suezmax rates.
Tanker earnings for both classes of vessels have risen from a year ago, but most of the gain has been erased in the past month due to the glut.
The ratio of newly commissioned to retired vessels has held steady since 2008, doing little for the oversupply in the tanker market, data from maritime consultancy firm Clarkson Research Services showed.
Utilization of the crude tanker fleet is just above 80 percent, according to industry estimates.
SHIP VS RAIL
The widening Brent-WTI spread notwithstanding, East Coast refiners still face the high cost of moving crude by rail.
It costs about $17 to move Bakken crude by rail to an East Coast refinery, compared with just about $2 to import a barrel of Brent or West African crude, according to analysts.
While Phillips 66 and PBF Energy Inc have said they would replace Bakken crude with some imported crude at their East Coast refineries, analysts say rising U.S. oil production will continue to replace imports.
"I would bet that imports to the East Coast are lower a year from now than they are today," said John Williams, an investment analyst at T. Rowe Price. "Refiners can't make that much money by importing oil."
Domestic production of crude oil, at 7.61 million barrels per day (bpd), touched the highest level last week since October 1989, data from the U.S. Energy Information Administration showed.
"Longer term, a more energy-independent United States is potentially negative for crude tankers," said Wennberg.