Page 37 - Oil & Energy - March 2013

March 2013 • 37
Market Stance
Shipping Costs Loom Large in Basis
By David Shuck, Hedge Solutions
AS HEATING OIL DEALERS GO ABOUT LIFTING
product at the rack (oil terminals) every
day, there are subtle and not so subtle
nuances to the variables that impact
that cost. Everyone is familiar with the
obvious mover of price, the futures market.
It moves with rapidity and, most would
agree, unpredictability.
The other notable price mover is basis.
Most in the industry view basis simply as
the delta between the NYMEX spot price
and what we pay when we lift product. Basis
is the best indicator of localized supply
and demand for a market or region. As a
consultant I develop strategies to control
basis, hedge efficiently and profit from
location anomalies. We are always drilling
the importance of managing basis into our
clients’ heads. Lots of monies are left on the
table if mismanaged!
BASIS DRIVERS
One of the most dominant yet myste-
rious influencers of oil prices is the cost
of moving product. “Shipping” the oil is
effected via water, pipeline, rail or truck.
Let’s look at the “water” method and
understand how it impacts basis. A majority
of heating oil, ultra-low sulfur diesel, and
gasoline is delivered by barge on the East
Coast. These vessels, with capacity ranging
from as little as 15,000 to 150,000 barrels
(or more), offer greater flexibility than
pipeline delivery without fixed contracts.
Unlike trucking or rail, they can move
large volumes in a single “voyage” quickly
and economically. Barges loading in New
York Harbor with heating oil and ultra-low
sulfur diesel are likely the source of supply
to a terminal near you. The most common
delivery and supply destinations for oil
loaded in New York Harbor are between
Portland, ME, and Baltimore, MD.
INFLATIONARY FACTORS
Weather, seasonality, refinery outages
and fuel prices all play a significant role in
determining rates. Demurrage, the supple-
mental charge the supplier pays to the
barging company for using a barge beyond a
specified time frame, is another inflationary
factor. Inclement weather can also affect
charter markets by delaying tonnage and
making availability scarce.
What about fuel prices? With the cost
of distillates rising over the years, the cost
of marine fuel impacts rates and product
cost. With barge owners operating on
historically thin margins, the charter
rates for these small ships have closely
corresponded with fuel costs. In fact,
according to the barge broker I worked
for, Poten & Partners, charter rates on all
sizes of equipment correlated closely with
the price of fuel over the last year. For
example, charter rates on the 20,000-to-
30,000-barrel barge started the spring of
2012 near $1.00 per barrel on movements
across New York Harbor. By July, with fuel
prices trending lower, the same barge was
chartering closer to $0.75 per barrel on the
same movement across New York Harbor.
Today, that rate is back up to around $0.90
per barrel.
Seasonal factors can affect charter rates
as well. Finding a barge to move ultra-low
sulfur diesel or heating oil during spring
– while most of the fleet is being cleaned
to operate in the gasoline trade – can be
difficult. Barge owners understand that they
have the leverage of holding scarce equip-
ment to move a specific cargo during these
transitional times of year and therefore can
charge more.
Shipping costs are also affected by
restrictions contained in The Jones Act.
Also known as the Merchant Marine Act
of 1920, this federal statute mandates that
all goods transported by water between
U.S. ports be carried on U.S.-flagged ships,
constructed in the United States, owned by
U.S. citizens, and crewed by U.S. citizens.
Its purpose is simple; to protect and sup-
port the U.S. maritime industry.
Well intended, the decree can effectuate
higher shipping costs. U.S. minimum wage
laws, a lack of U.S. shipyards, and a shortage
of American-produced steel are several
factors spawned from this early century
statute. As domestic taxes and prices for
materials and personnel rise, there is less
incentive for ship-owners to produce more
vessels to service the trade. Fewer vessels
servicing the trade means a tighter market
and higher charter rates for suppliers. With
the strict, expensive requirements of the
Jones Act already contributing to dwindling
fleet size, even modest weather systems in
the Northeast can quickly cause a scarcity
of available tonnage for suppliers to move
their cargo.
WEATHER-RELATED DELAYS
Delays caused by inclement weather can
translate into large demurrage claims on
suppliers while tonnage is “on the clock”
waiting to discharge cargo. Consequently,
events like Hurricane Sandy have prompted
the President to waive the Jones Act,
allowing suppliers to use foreign-flagged
vessels to move product with minimum
disruptions.
Severe cold can also have an impact on
shipping costs. Ice formation can prevent
barges from reaching their discharge
destination or delay them in their voyage.
Ice charges, like demurrage charges,
are built into charter contracts by barge
owners so they can bill costs associated
with ice delays.
A precise formula for understanding
every aspect of the price will never exist,
because each situation is unique and vari-
able. What is evident is that transportation
costs will always be passed on to end-users
because suppliers don’t have the margins
to absorb the extra costs. With barge
transportation so prominent in East Coast
heating oil and ULSD, charter rates will
move, as will basis and, ultimately, your
cost at the rack.