Suezmaxes

West Africa – lost to the VLCCs

West African barrels account for nearly 15% of global Suezmax liftings, despite the crude production
woes in Angola and Nigeria. The West Africa to US trade is the 3 rd largest Suezmax trade for West African
barrels. But a looming change likely to see a chunk of the traditionally Suezmax trades migrate to the
VLCCs.

Suezmax trades ex West Africa

0 200 400 600 800 1000 1200

W AFRICA to MED

W AFRICA to NW EUR

W AFRICA to EC N AMERICA

WAF- Others
2018 2017
W AFRICA to S AFRICA

W AFRICA to EC S AMERICA
2016 2015
W AFRICA to Indi a

W AFRICA to SE ASIA 2014

W AFRICA to W AFRICA

W AFRICA to USG

The WAF to US crude trade is an on again / off again flow, changing according to the spread between
Brent and WTI crudes. If WTI remains cheaper than Brent by more than about $3/bbl, refiners on the US
East coast replace seaborne African crudes by similar US/Canadian crudes transported by railcars.

WTI’s discount to Brent has exceeded the$3/bbl threshold since the start of the year, hitting $11/bbl this
week. Predictably the change in trade flows has started, with crude by rail displacing imported seaborne
crudes from Africa (see charts).
 Crude supply to USAC vs WTI/ Brent spread
600 600

WTI di s count to Brent (RHS)

500 500

400 400

300 300

k b/d $/bbl
200 200

100 100

- 0
M -13
Ja 14
Se 15
M -15
Ja 16
Se 17
17
Se 13

p-
n-

n-

n-
ay

ay
p

p
Ja

The full impact on Suezmaxes however will only be felt once refiners have exited their term lifting
contracts from WAF/NAF producers. When the reverse happened in 2016 and 2017, the difference to
Suezmax demand was substantial, with a doubling of the number of WAFR to US voyages (chart below).

# of Africa to US Suezmax voyages

140
USG - USA EC N AMERICA - USA
120

100

80

60

40

20

0
2014 2015 2016 2017 2018

The dominant reason for the blow out of WTI’s discount to Brent is insufficient pipeline capacity to move
surging crude production out of the Permian basin and to the Gulf coast. New pipelines are being built
but they are scheduled to come on stream only by the end of 2019. WTI’s discount to Brent, therefore, is
likely to remain above the ‘switching threshold’ for the next 12 to 18 months.

What happens then to the African crude that will now no longer be shipped to the US. And to the
Suezmaxes that are engaged on that trade?

Could the African barrels displaced from USAC be exported to Europe instead and provide replacement
demand for Suezmaxes? Europe is not a growth market. This implies that Africa crudes will need to
displace other light sweet crudes such the US from the crude slate of European refiner’s. But US crudes
trade at a discount to Brent while African crudes trade at a premium to Brent, making that switch
unlikely.

Replacing Europe’s imports of Iranian light crude – if European refiners stop buying from Iran under US
sanction – might offer a replacement market for Africa crude and for Suezmaxes. But that just swaps
Suezmax from Iran-Europe trade to Africa-Europe trades.

In our view, the most likely outlet for the displaced African crudes will be to Asia. And that is a VLCC
trade.