Asia Buyers of U.S. Oil Struggle on Tight Ship Supply

Asian buyers of ultra light oil from the United States are struggling to find small-sized ships willing to undertake the month-long voyage at affordable rates as U.S.-Asia oil trade flows grow.

U.S. exports of the ultra light oil to Asia are expected to double in August with two shipments lined up, but shipowners are reluctant to take on the jobs as they risk having to send their ships back empty.

The imbalance in global oil trade flows has tightened oil tanker supply as more ships are sent on longer voyages from the west to meet demand in Asia, but rising U.S. oil production negates the need to send oil back to the west.

"Why would you want to send a Panamax to Asia? There's nothing to do but ballast back," said one U.S.-based charterer.

The United States loosened a decades-old ban on selling U.S. crude abroad this year when it allowed Enterprise Products Partners and Pioneer Natural Resources to export the ultra-light oil if it has been minimally refined.

Japanese trading firm Mitsui & Co loaded the first condensate cargo on July 30. A second cargo, also purchased by the trader, was scheduled to load Aug. 8-10 for a destination in Asia, but it has not been shipped yet, a delay traders and shipping sources attributed to the high cost of Panamax tankers.

Mitsui has declined to comment.

FREIGHT RATES RISE

Panamax vessels, also known as LR1s, can carry about 500,000 barrels of oil and are the largest class of ship able to fit through the Panama Canal. They are well-suited to shallow ports in the Atlantic Basin but Asia's deeper ports beckon larger ships, leaving little opportunity to profitably trade a smaller Panamax.

An alternative would be to charter a larger vessel, such as very large crude carrier (VLCC), but this would need to travel around the Cape of Good Hope, adding about 50 percent more travel time.

In the past few weeks, charterers appeared less willing to send Panamax vessels on an ad-hoc journey to Asia, particularly as rates to nearby Latin American and Caribbean destinations climbed since June, reaching levels double those of a year ago.

"It's really a difficult decision to send a vessel east when you're leaving a favorable market," said Jason Klopfer, commercial director at Navig8 Americas, which manages a pool of more than 100 tankers.

The first condensate cargo is sailing on the BW Zambesi from the U.S. Gulf to Asia, fixed for a reported lump sum of $1.8 million.

While the shipowner could earn about $20,000 a day after accounting for operating expenses of around $800,000 on the one-way trip, it was unclear if it could make a profit on the leg back to the United States.

Daily rates for Panamax tankers averaged around $27,000 to $35,000 a day between the U.S. Atlantic Coast, the U.S. Gulf Coast and the Caribbean in the week through Aug. 8, according to a weekly report from Charles R. Weber, a Connecticut-based shipbroker.

By contrast, rates for similar-sized ships dedicated to carrying refined, or "clean", petroleum products had softened in recent weeks to $10,000 to $14,000 per day, leading to speculation that Cosmo Oil Co., which has purchased the third condensate cargo, might charter a clean tanker for the trip.

However, rates for clean LR1 tankers reportedly firmed slightly over the weekend, shipping sources said, while crude tanker rates have softened. The problem may now be simply finding an open ship.

"I don't have anything available right now that could make that run," said one charterer.

Condensate buyers could also try to time their shipments on vessels that need to "dry dock," or be brought ashore for maintenance, which often takes place in Asian shipyards, said shipping sources.

Buyers may eventually opt for larger-sized cargoes as Asia's demand for U.S. oil grows.

"The main market (for U.S. oil) will be in Asia and freight is a key factor," said a Singapore-based trader. "The oil is easy to process for refineries and it'll be okay for them to take cargoes of a significant size once suppliers can export bigger volumes."

By Anna Louie Sussman and Florence Tan (C) Reuters 2014.