The long term demand for crude oil in the state of California, could be a sign of things to come for the tanker market, as the world, gradually, moves towards cleaner energy sources. In its latest weekly report, shipbroker Gibson said that “the state of California is a unique case in the US energy market, particularly when it comes to crude oil. Thanks to local environmental laws, around 75% of the state’s oil demand has to be met with overseas barrels due to a lack of interstate pipelines connected to California and regulations limiting rail imports. On top of that, the Jones Act limits the ability to ship crude from US export terminals. This makes the state a net importer of non-US crude, a very different dynamic compared to other states with large crude deposits and growing exports. Additionally, new rules on oil drilling are putting pressure on state wide oil production which will likely mean even more crude will need to be imported over the coming years. There is little sign that policy will change therefore, what extra support could the tanker market find from the Golden State?”
Source: Gibson Shipbrokers
According to Gibson, “after the Covid-19 drop in crude imports, there has been a gradual recovery in volumes with this year averaging 863 kbd, although these have trended higher back in 2018 and 2019. Flows data also shows a stable preference for medium sour crude by state refiners with Saudi Arabia, Ecuador, Iraq and Brazil all being the main load countries, mostly via Suezmax and Aframax tankers. Perhaps one of the most interesting opportunities from the state could be the start up of the Trans Mountain Pipeline Extension project where despite not necessarily being a good match it terms of grades, at least some Albertan crude is expected to be purchased by USWC refiners. Although, if demand materialises, this will likely have limited impact on tonne miles given the relatively short distance required to ship the cargoes. Nonetheless, another discharge option in the region may create some interesting trading opportunities for Pacific basin Aframaxes”.
“Meanwhile, over a longer horizon, California’s ageing refineries and strict regulatory framework for the sector may put a dampener on longer term crude demand in California. This will make the state more dependent on clean product imports to meet demand if refinery units close. The region is already net short in gasoline and this may give rise to higher transpacific MR demand for vessels loading in the Far East, particularly South Korea. Some of these facilities are also likely to see conversion to biofuel import terminals which could benefit the specialised tanker market or product tankers carrying these cargoes, with a diverse source of potential suppliers in both Asia and Latin America”, the shipbroker said.
Over the longer term, the outlook for the state’s oil demand is generally bearish. Recent data from the California Energy Commission shows the state hit its 2025 electric vehicle (EV) sales target two years ahead of schedule and EV demand remains very firm. This is likely to impact local gasoline demand which will start to create a challenging demand outlook for state refiners. On top of this, state-wide energy transition targets are typically more ambitious than other states and the political mood is unlikely to shift in favour of hydrocarbons, instead it is likely to accelerate this lower carbon agenda. Therefore, while there is likely to be some short to medium term support for the tanker market, the current longer term trajectory appears less favourable and might be one of the first examples of the paradigm shift away from oil in advanced economies.
Nikos Roussanoglou, Hellenic Shipping News Worldwide
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