19th March 2010 - Go East Young Man - But Then What Happens In The West?

In the oil business, the ‘global' economic recession has in reality been an OECD recession.  Growth in oil demand and imports has still been apparent in the big, developing economies in Asia-Pacific (namely China and India).  However, in the US and Europe oil demand has fallen sharply over the past 2 years, with US oil demand down by 2 million b/d (minus 10%) and Europe down by 0.9 million b/d (minus 6%).  These changes have had a huge, negative impact on the refining industries in these regions, with refining margins falling to such low levels that refinery throughput has been cut massively (with oil companies also now looking at the closure and possible sale of refining capacity).  So far this year, refinery throughput of crude oil in the US is 0.9 million b/d lower than 2 years ago; towards the end of last year European refinery throughput was some 1.2 million b/d lower than 2 years earlier.  These cutbacks in refinery runs have led to sharp reductions in crude trade from the Middle East to the US and Europe.  The chart below illustrates monthly crude imports of Middle East crude into the US and Europe, which shows combined trade generally at 4.5-5.0 million b/d through 2006, 2007 and most of 2008.  However, these volumes have now fallen to less than 3 million b/d, which is equivalent to losing one Mid East VLCC loading to the West each day.  

However, this weakness in long haul trade to the West has in fact meant a relative strengthening in the Atlantic Basin VLCC market over earnings in the much bigger Middle East to Asia-Pacific trades!  This is because there is now a lack of VLCCs carrying Mid East crude to the West and hence a far more limited availability of tonnage to load the increasing volumes of West African, Latin American and North African crude going to the expanding refining centres in the east.  This is unlikely to change and so there will be a continuing requirement for VLCCs to ballast from east to west, maintaining a market premium for VLCCs loading in the Atlantic Basin.