China’s manufacturing activity is essential to world oil demand

Market Realist

Why the crude oil shipping industry could bottom (Part 4 of 9)

(Continued from Part 3)

China’s manufacturing activity

Since manufacturing has been a large part of economic growth in China over the past decade, the country’s economic activity plays an important role in the world’s tanker demand. When manufacturing activity rises, China will import more oil as the country gets wealthier, buys cars, and uses more oil, which would be positive for tankers because more ships haul oil from the Middle East and West Africa. In 2012, China’s oil consumption per capita was only about 24% of major developed countries’.

Purchasing manufacturers’ index

China’s manufacturing PMI (purchasing manufacturers’ index) is an indicator widely followed by money managers, policymakers, economists, traders, and analysts. Because of its timeliness—reported at the beginning of every month for the previous month—it’s highly regarded as a leading indicator for the future demand of dry bulks.

China’s PMI rose to its highest level since April 2014. The PMI, which stood at 51.5 in September, slightly rose to 51.4 on October. Figures above 50 indicate solid expansion, while those between 42 and 50 show possible growth, and levels under 42 signal a potential recession. As the chart above shows, year-over-year growth in oil consumption has historically followed movements in the manufacturing PMI. So you should take the October data as a positive.

Lacking demand momentum

While October’s data was positive, investors should note that last month’s manufacturers’ sentiment wasn’t particularly great. The largest increase in the headline figure—which is comprised of indexes for new orders, production, raw-material inventory, employment, and suppliers’ delivery time—shows only production strength, rising from 52.9 in September to 54.4 in October. While new orders were still above 50, they fell from 50.7 in September to 50.4 in October. So you could say domestic and external demand still lacks momentum.

A period of transition

After falling for much of 2011 and 2012, manufacturing sentiment in China turned up in 2012, as inflation and growth slowed, prompting the central bank to ease monetary policy and provide some juice to the economy. PMI, however, remains weaker compared to historical standards because the new government isn’t eager to provide large stimulus like previous governments did as it tries to rein in shadow banking (think of making loans in the black market with high interest rates) to steer the economy away from public infrastructures to private consumption, and to craft and enact reforms.

Weak growth is not bad

This isn’t all negative, of course. Demand for crude oil has risen at a decent pace over the past few months. While it’s unlikely that we’ll see China’s manufacturing PMI hit above 52 in the short term, or for China’s oil import to surpass United States’ in the short to medium term, it nonetheless helps. As long as we see China continue to grow at a stable pace, consumption should grow and tanker stocks like Tsakos Energy Navigation Ltd. (TNP), Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), and Frontline Ltd. (FRO) will benefit. The Guggenheim Shipping ETF (SEA) will be a safer way to ride China’s economic growth, as it’s less influenced by falling U.S. crude oil imports that negatively affect crude tanker rates.

Continue to Part 5

Browse this series on Market Realist:

Rates

View Comments (0)

Recommended for You

  • ARGENTINE STOCKS CRASH

    Argentina's stock market is tanking after the...

    Business Insider
  • Airbus adamant no room for more talks in cancelled Japan jet deal

    Airbus on Thursday said its decision to cancel a $2.2 billion jet order from Skymark Airlines was final, rejecting the Japanese carrier's suggestion that talks were still ongoing. The European aircraft maker said this week it had informed Skymark that its purchase of six A380 superjumbos "has been…

    AFP
  • Enjoy this refreshing Triple Play offer!

    Get FIOS TV Mundo starting at $79.99/mo. w/ no annual contract + 2-yr. price guarantee. Or sign a 2-yr agmt. & choose your bonus! Click for details.

    AdChoicesVerizon FiOSSponsored
  • In San Francisco real estate, $1M won't buy much

    SAN FRANCISCO (AP) — San Francisco Association of Realtors President Betty Taisch has two words of advice for those who want to live here and think $1 million will buy them their dream house: Think again.

    Associated Press
  • Obama to GOP: 'Stop just hating all the time'

    KANSAS CITY, Mo. (AP) — Pointing the finger at Republicans for congressional inaction, President Barack Obama chided lawmakers Wednesday for spending the waning days before their month-long summer break trying to sue him rather than addressing economic issues that could boost the middle class.

    Associated Press
  • Tesla posts 2Q loss, prepares Nevada factory site

    PALO ALTO, Calif. (AP) — Electric car maker Tesla Motors widened its loss in the second quarter as it prepared for the launch of a new SUV and started work on a massive new battery plant.

    Associated Press
  • US warns against traveling to Ebola-hit countries

    NEW YORK (AP) — U.S. health officials on Thursday warned Americans not to travel to the three West African countries hit by an outbreak of Ebola.

    Associated Press
  • 3D Systems Shares Are Cratering

    Shares in 3D Systems were down more than 12% in...

    Business Insider
  • 4 Unusual Savings Strategies That Really Work

    It's just one of those facts of life: Saving money can be really hard. If you're trying to save and not getting ahead, it might be time to try one of these easy, everyday savings habits that will help you tighten your finances.

    U.S.News & World Report LP
  • Pop-Tarts Crazy Good Summer!

    Free concerts, hot artists and a Pop-Tarts party all summer long! Crazy Good Summer is back! Dont miss out!

    AdChoicesKelloggs Pop-TartsSponsored
  • Wisconsin Supreme Court upholds 2011 union law

    MADISON, Wis. (AP) — The fight over Wisconsin Gov. Scott Walker's signature policy achievement, a law effectively ending collective bargaining for most public employees, ended Thursday with the state Supreme Court declaring it to be constitutional.

    Associated Press
  • Play

    Why Do Millennials Prefer Cash to Investing Money?

    In the last year, the S&P 500 delivered 17% and cash investments delivered 1%. Which would you rather have? In a Bankrate study, millennials said they'd rather have the cash. The Mutual Fund Store's Senior Vice President of Investments Andy Smith joins Simon Constable on the News Hub to discuss.…

    WSJ Live
  • What SunPower Earnings Mean for First Solar and SolarCity

    After markets close Thursday, solar panel maker SunPower will report second-quarter results. Competitors First Solar and SolarCity are scheduled to report results next week.

    24/7 Wall St.
  • Sanctions will damage Russia if not lifted quickly

    MOSCOW (AP) — U.S. and European sanctions against Russia's energy and finance sectors are strong enough to cause deep, long-lasting damage within months unless Moscow persuades the West to repeal them by withdrawing support for Ukrainian insurgents.

    Associated Press
  • Adidas shares plunge 13% after Russia warning

    Adidas shares tanked more than 13 percent after it cut its profit targets for 2014, warning "tensions" in Russia would hit its bottom line.

    CNBC
  • Play

    Tesla's Earnings: What to Watch For

    Electric-car maker Tesla is scheduled to be released after the bell Thursday, and Mike Ramsey joins MoneyBeat with Paul Vigna to preview the results.

    WSJ Live
  • 5 Questions That Will Not Get You Hired

    The wrong questions can tank even the best interview. Here are five questions you should never ask in a job interview.

    AdChoicesMonster.comSponsored
  • Bank of America ordered to pay $1.27 billion for 'Hustle' fraud

    By Jonathan Stempel NEW YORK (Reuters) - A federal judge on Wednesday ordered Bank of America Corp to pay a $1.27 billion penalty for fraud over shoddy mortgages sold by the former Countrywide Financial Corp. U.S. District Judge Jed Rakoff in Manhattan ruled after a jury last October found the…

    Reuters
  • Why You Should Prepare for the Next Bear Market Now

    The stock market is going gangbusters these days, with the S&P 500 close to surpassing 2,000 points. While the index may never fall back to that level, bear markets will one day hit us hard again. It's a good idea to develop a plan for the next bear market now, while your asset values aren't free…

    U.S.News & World Report LP
  • 5 Little-Known Ways to Boost Your Retirement Savings

    Saving for retirement is no easy task. Fortunately, we have several tools and strategies that can help us reach our retirement goals. Maintain your asset allocation. When you begin investing you typically select an asset allocation that suits your risk tolerance and investment goals.

    U.S.News & World Report LP
  • Panasonic, Tesla to build giant battery plant in US

    Japanese electronics giant Panasonic and US electric vehicle maker Tesla Motors said Thursday they will jointly build and operate a huge lithium ion battery plant known as the Gigafactory. Under the deal, Tesla will run the operations at the proposed US-based plant, while its Japanese partner will…

    AFP
  • Alcatel-Lucent cuts losses but shares slump

    Telecommunication equipment group Alcatel-Lucent said Thursday it cut net losses by more than half in the second quarter as it battles to rebuild after years of setbacks. Alcatel-Lucent said its quarterly net loss was 298 million euros ($399 million), down from 885 million euros for the same period…

    AFP
  • Analyst’s Four Gold Miner Takeover Targets May Include a Gigantic Winner

    A new research report from Cowen suggests that some of the senior gold miners are looking to make acquisitions now and will make the play to acquire some of the undervalued developers.

    24/7 Wall St.
  • Summer means sizzling savings at Sears.com

    Save big on appliances, apparel, lawn and garden, tools and more. For fun in the sun or a project in the shade, start your search at Sears.

    AdChoicesSearsSponsored