■ On 18 December, the US House of Representatives and Congress approved, and President Obama signed, the lifting of the 40-year ban on US crude oil exports.
■ While theoretically positive for aframax demand, the reality is much more muted.
■ We see no reason to change our Neutral call on the sector; MISC remains a technical Add but we advise investors to look for an exit sometime during 1H16.
US crude oil exports to be lifted
● The imposition of the US crude oil export ban came in the wake of the first OPEC oil embargo in October 1973, which was meant to punish the US for its involvement in the 1973 Yom Kippur War. But after the discovery of plentiful supplies of shale oil and gas, as well as rising Gulf of Mexico prodiction topped up by Canadian pipeline supplies, the US now feels secure enough to lift the ban, signed into place last Friday.
Theoretically beneficial for tanker demand
● This is theoretically beneficial for tanker demand, as the US could possibly export its light, sweet crude oil to various proximate markets, but continue to import heavy, sour crude that its refineries are optimised to process. Two-way trade is always great for shipping. If this happens, aframax tankers will be the tankers of choice, as Gulf of Mexico ports are too shallow to berth larger tankers.
Aframaxes are the prime beneficiary
● The only VLCC-capable port is the Louisiana Offshore Oil Port (LOOP), but LOOP is configured as an import terminal, so its use as an export hub will not happen in the near future. VLCCs may be used for US crude oil exports, but that requires reverse lightering, which would also benefit aframaxes used for ship-to-ship transfer of crude oil from the berths to the VLCCs.
In reality, the impact on tanker markets will be negligible
● In an opinion article, shipbroker Poten noted that US oil exports will not be significant in the near future because oil markets are already oversupplied, and the discount of WTI crude against Brent has narrowed materially. Also, the IEA has forecast total US crude oil production to fall 0.425m bpd from 12.825m bpd in 2015 to 12.4m bpd in 2016 (due to lower shale oil production partially offset by higher Gulf of Mexico production), which is likely to reduce the propensity of the US to export.
The US EIA forecasts stagnant US crude oil export volumes
● The US EIA forecasted in September 2015 that US crude oil exports may increase from the present level of 0.5m bpd, to 1.5m bpd or higher by 2020, if US domestic crude oil production is plentiful. However, in a scenario combining low oil prices and stagnant or declining US crude oil production, US crude oil exports are expected to remain largely unchanged.
Look for selling opportunities in 1H16
● We reiterate our view in our recent 16 December report that crude tanker freight rates will likely soften in 2H16 and then fall aggressively in 2017. Although we maintain MISC as a technical Add, with an SOP-based target price of RM10.03, we believe investors should watch for an opportunity to take profit sometime in 1H16. (Read Report)
Source : CIMB Research