The recent revelation that the U.S. Department of Commerce is allowing certain companies to export minimally refined condensates was bad news for the refining industry. However, the news is exciting for the shipping industry. Scorpio Tankers (NYSE: STNG), Nordic American Tankers (NAT +5.68%), and to some extent DryShips (DRYS +0.00%) are all set to benefit as the demand for tankers to export refined product and condensate out of the U.S. jumps.
Slow and steady
It's unlikely at first that the volume of condensate exported from the U.S. will be significant. Some analysts believe that condensate production and export is likely to remain below 500,000 barrels per day through 2015, which is approximately 6% of U.S. daily production.
Nevertheless, even though export volume out of the U.S. is likely to be minimal, it will have a positive effect on the tanker market. The first quarter conference calls of DryShips, Scorpio, and Nordic American show why even a slight increase in U.S. export volume is likely to boost the tanker market.
Lack of supply
On DryShips' first quarter earnings conference call, the company revealed that the demand for crude transport and tankers for 2014 is going to exceed supply. DryShips' management believes that the demand for crude transportation is likely to rise by 2% during 2014. Meanwhile, the global crude tanker fleet is only expected to expand by 0.4% during 2014.
The rising demand and lack of supply has already started to affect the market. During the first quarter, spot rates for large tankers, namely Suezmax and Aframaxm shot up by 113% and 119% year on year.
Meanwhile, Scorpio's management revealed during the first quarter conference call that:
We actually see during the period newbuilding delivery percentage going down as deliveries exceeding new orders with a weakness referred product on the capital market. But we are seeing our customers actually pay us higher for forward rates and they have done at this time last year...
This provides yet more support for the argument that the demand for crude transportation is exceeding supply as customers pay more to secure the use of vessels.
Little capacity
All in all, it seems as if tanker rates are about to enter a bull market due to a lack of supply.
With demand already increasing at a rate of more than five times supply, it is easy to see how analysts have been able to conclude that this new export allowance will be a net positive for the tanker industry.
Nordic American is also set to benefit from a lack of supply. The company will specifically benefit as the global Suezmax fleet starts to shrink.
All 20 of Nordic's vessels are Suezmax, less than 5% of the global fleet. Between now and 2016, only 30 more vessels are expected to enter the fleet. During the past three years, however, 35 vessels have left the fleet and been scrapped.
If this trend continues, the Suezmax fleet will shrink instead of grow over the next few years while the demand for tankers rises.
Teekay Tankers' quarterly tanker market update tells us what effect this lack of supply is already having on the market:
Crude tanker spot rates strengthened significantly during the first quarter of 2014, with Aframax and Suezmax rates achieving their highest quarterly averages since the fourth quarter of 2008 and the second quarter of 2010, respectively...
That's great news for Nordic with its Suezmax fleet.
Foolish summary
As demand for tankers rises faster than supply, day rates for tankers are surging. This trend is only likely to get worse as the U.S. starts to export more refined product and oil condensate. With demand for tankers surging and supply tightening, Nordic American, Scorpio, and DryShips are heading for profitable times.
