Petroleum & Other Liquids

This Week in Petroleum

Release date: October 26, 2016  |  Next release date: November 2, 2016

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Low tanker rates are enabling long-distance crude oil and petroleum product trade

Shipments of crude oil and petroleum products using marine tankers support an integrated global market for crude oil and petroleum products. Recent expansion of the global tanker fleet has resulted in falling or lower tanker rates for much of 2016 that have widened the geographic scope for economically attractive trade at a time when inventories of both crude oil and petroleum products are at high levels.

On a global scale, demand for tankers is influenced by differences in supply and demand conditions across regional markets. Tankers of different sizes and classes have specific characteristics that help determine the markets and shipping routes they serve. For example, dirty tankers, which transport unrefined or less-refined cargos (such as crude oil and residual fuel oil), tend to be large, with low per-barrel transportation costs. Clean tankers, which transport refined products such as gasoline and diesel fuel, are typically smaller vessels (Figure 1).

The supply of tanker capacity of each type varies over time. Building new ships requires long lead times, and as ships age they are removed from service. In recent years, growing global oil production and growth in global refining capacity in markets distant from crude sources led to an increase in orders for new vessels in anticipation of an increasing need for tanker transportation. This resulted in several consecutive years of an expanding global tanker fleet, with an estimated 205 ships added in 2015 according to Thomson Reuters (Figure 2).

However, oversupplied global markets for crude oil and petroleum products beginning in late 2014 resulted in large global inventory builds. OECD commercial inventories of crude oil and other liquids grew to over the equivalent of 65 days of supply in 2015, and have continued to grow in 2016 (Figure 3).

As storage filled in regions that are traditional importers of crude oil or petroleum products, the demand for tankers to import additional supplies fell. Coincident with several years of growth in the global tanker fleet, this has resulted in some of the lowest tanker rates since the sharp drop in crude oil prices in 2008-09.

To date in October, monthly average rates for very large crude carrier (VLCC)-size range dirty tankers between the Arabian Gulf and Singapore, an indicator for the overall dirty tanker market, are down 23% from January. Rates for smaller average freight rate assessment (AFRA)-size range dirty tankers on the same route are down 49% from January. Rates for dirty VLCC-size range tankers and AFRA-size range tankers through October have each averaged 36% lower, than the full year 2015 average. Rates for clean tankers are also lower. The average October rate, to date, for a clean long range 1 (LR1)-size range tanker on the Arabian Gulf to Japan route is down 38% from January. The monthly average rate for a smaller medium range (MR)-size range tanker on the same route is down 22% from January (Figure 4).

Lower tanker rates are enabling an increase in opportunistic transactions. With lower tanker rates, the price spread needed for economically attractive trade between two markets narrows, making it possible for importers to bring in distant supplies at reduced cost. For exporters, lower tanker rates increase the price competiveness of their supplies in more distant markets. This may explain some of the motor gasoline imports to the U.S. East Coast in 2016 from relatively distant countries such as South Korea, Malaysia, Taiwan, and Japan.

Low tanker rates also aid the competitiveness of U.S. crude oil exports. Currently, no U.S. port is capable of loading the larger vessels typically used to transport crude oil, so U.S. crude exporters must use more expensive smaller vessels. However, with lower tanker rates, exporters may be able to load smaller ships at U.S. ports and transfer the cargoes onto larger vessels offshore for transport to final destinations at an attractive per-barrel cost. This may explain some crude oil exports in Customs data to places like the Marshall Islands, a nation where many vessels are registered but are unlikely taking deliveries.

Low tanker rates, supported by futures prices in contango (when prices for longer-term deliveries are priced higher than near-term deliveries) may incentivize shippers to take longer routes, such as around Cape Agulhas at the southern tip of Africa, rather than via the Suez Canal for a voyage to Europe from the Middle East. Although low tanker rates and high storage utilization reduces the contango spread needed for crude oil and petroleum products to be put into floating storage, current contango spreads are likely not large enough for floating storage.

Going forward, tanker rates should recover as the global market slowly returns to balance. EIA's current Short-Term Energy Outlook (STEO) forecasts a global quarterly stock draw in the third quarter of 2017, the first since 2013.

U.S. average regular gasoline retail price decreases, diesel fuel price remains unchanged

The U.S. average regular gasoline retail price dropped one cent from the previous week to $2.24 per gallon on October 24, up two cents from the same time last year. The Midwest price fell five cents to $2.11 per gallon, while the East Coast price dropped less than one cent to $2.23 per gallon. The Rocky Mountain price increased two cents to $2.29 per gallon, and the Gulf Coast price increased by one cent to $2.06 per gallon. The West Coast price remained virtually unchanged at $2.68 per gallon.

The U.S. average diesel fuel price dropped less than one cent, remaining at $2.48 per gallon, down two cents from the same time last year. The Midwest price dropped one cent to $2.45 per gallon, while the East Coast and Gulf Coast prices each fell less than one cent to $2.47 per gallon and $2.35 per gallon, respectively. The West Coast and Rocky Mountain prices each increased less than one cent to $2.75 per gallon and $2.55 per gallon, respectively.

Propane inventories fall

U.S. propane stocks decreased by 2.1 million barrels last week to 100.6 million barrels as of October 21, 2016, 1.0 million barrels (1.0%) lower than a year ago. Gulf Coast and Midwest inventories decreased by 1.9 million barrels and 0.3 million barrels, respectively, while Rocky Mountain/West Coast inventories increased by 0.1 million barrels and East Coast inventories remained virtually unchanged. Propylene non-fuel-use inventories represented 3.4% of total propane inventories.

Residential heating fuel prices increase

As of October 24, 2016, residential heating oil prices averaged $2.39 per gallon, one cent per gallon more than last week but three cents per gallon less than last year at this time. The average wholesale heating oil price is $1.64 per gallon, one cent per gallon more than last week and nearly eight cents per gallon more than a year ago.

Residential propane prices averaged just under $2.07 per gallon, one cent per gallon more than last week and almost 16 cents per gallon more than one year ago. Wholesale propane prices averaged 70 cents per gallon, two cents per gallon higher than last week and nearly 18 cents per gallon more than last year's price.

For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.

Tags: crude oil, inventories, petroleum products, transportation

Retail prices (dollars per gallon)

Retail price graphs
  Retail prices Change from last
  10/24/16 Week Year
Gasoline 2.243 -0.014 0.015
Diesel 2.478 -0.003 -0.020
Heating Oil 2.392 0.012 -0.030
Propane 2.067 0.014 0.158

Futures prices (dollars per gallon*)

Futures price graphs
  Futures prices Change from last
  10/21/16 Week Year
Crude oil 50.85 0.50 6.25
Gasoline 1.531 0.037 0.227
Heating oil 1.574 0.007 0.120
*Note: Crude oil price in dollars per barrel.

Stocks (million barrels)

Stock price graphs
  Stocks Change from last
  10/21/16 Week Year
Crude oil 468.2 -0.6 20.2
Gasoline 226.0 -2.0 7.4
Distillate 152.4 -3.4 10.3
Propane 100.567 -2.115 -0.996