Jones Act spot market oversupplied: OSG
New York, 9 November (Argus) — Rates garnered by vessels owned by New York-listed Overseas Shipholding Group (OSG), a major Jones Act vessel operator, fell sharply year-to-date in 2017. The company's 22-vessel strong fleet has increasingly entered the oversupplied spot market, and hurricanes in the Gulf coast disrupted domestic oil cargo flows also impacted revenue, the company said in an earnings call today.
The decline in domestic crude transportation in recent years, partially as a result of the late 2015 reversal of the US crude export ban, has resulted in a surplus of Jones Act tonnage capacity.
Reflecting the demand decline, time charter equivalent (TCE) rates for the company's ATB fleet dropped 47pc year-on-year to about $18,000/d in the third quarter, the company said.
OSG continues to maintain its preference for securing long-term time charters for its tankers and articulated-tug barges (ATBs) but conceded that the surplus of Jones Act-compliant vessels, and resulting low spot rates, has made longer term charters largely unattractive or unavailable, OSG chief executive Sam Norton said.
A counterparty in over 50pc of spot ship fixtures in the third quarter, OSG has more exposure to the Jones Act spot market than any of its competitors, the company said.
OSG has opted to place its vessels in the spot market, as opposed to laying some of them up or fixing them at weak rates for longer terms, partially because it sees "latent" demand for crude transportation.
"We are seeing more demand for crude transportation, manifesting itself in cross-Gulf movements, as opposed to upcoast movements", Norton said.
A further widening of the Brent-WTI spread, which would make US crude at Gulf coast terminal cost effective for east coast refiners, would add significant ton-mile demand to the Jones Act market, Norton said.
Though the Brent-WTI spread has been consistently above $6/bl for the last two months, the coastwise route has not picked up demand. The spread between WTI at Cushing and WTI at Houston has also widened to about $5/bl because of burgeoning demand for pipeline transportation of Permian crude to the Gulf coast, Norton noted. This has had the effect of largely shutting the Texas-US east coast crude arbitrage.
"We consider the market to be tighter than what it appears on a static analysis, as was illustrated by the sharp market moves experienced during this past hurricane season", said Norton.
While hurricanes Harvey and Irma led to a temporary uptick in Jones Act chartering rates, the hurricanes ultimately had a negative impact on the company's revenue, which fell 23pc year-on-year in the third quarter.
The hurricanes led to a 14-day Jones Act waiver in September, extending the pool of available ships for domestic cargo movements to international-flag vessels, which operate at lower costs than Jones Act ships.
"Foreign flag vessels fixed under the Jones Act waiver took away cargoes that might have otherwise been fixed on OSG's Jones Act ships", Norton said. OSG estimated that as many as eight international tankers were fixed under the waiver.
Low freight rates and an aging ATB fleet caused OSG to remove the OSG-252 and its associated tug, the Navigator, from the market in the third quarter. The ship was due for an "intermediate survey" this month and the cost of compliance with the survey did not justify the investment, the company said.
"It has been removed from service. We are evaluating our options. It will not be sold to a competitor and will not return to the Jones Act crude oil and petroleum product trades", said Norton.
Whether or not OSG decides to retire more of its older ATB tonnage depends on a few factors, according to the company. An explosion on a non-OSG ATB in the last quarter "called into question" the continued use of four sister ATBs, Norton said. But the general litmus test for deciding to remove an ATB is whether or not in the medium-term it will contribute positively to cash-flow, and that depends on the rate at which the vessel can be fixed and on its utilization, he said.
OSG operates nine medium-range (MR) tankers, three shuttle tankers, six ATBs, two lightering ATBs, and two tankers that are contracted with the US Maritime Security Program (MSP).
OSG reported a $6mn loss in the third quarter. The loss was mitigated by strong performance in the company's "niche market activities", including lightering in the Delaware Bay, shuttle tanker movements, and the MSP contracts.