Key crude tanker trends (October 25–30) (Part 1 of 9)
What is this weekly series for?
At MarketRealist.com, we break down key indicators that drive or highly correlate with the performance of an industry or major publicly traded companies. Understanding how these indicators affect fundamentals or what they might suggest should help investors get a clearer picture of the industry environment and make sound decisions.
Shipping rates: A key driver of shipping stocks
In a highly competitive industry like shipping, shipping rates are perhaps the most important indicator that affects the long-term performance of stocks. When shipping rates for transporting unrefined oil are on the rise over the medium to long term, crude tanker stocks and ETFs like Teekay Tankers Ltd. (TNK), Frontline Ltd. (FRO), Tsakos Energy Navigation Ltd. (TNP), Nordic American Tanker Ltd. (NAT), DryShips Inc.’s (DRYS) crude tanker business, and the Guggenheim Shipping ETF (SEA) tend to benefit.
Shipping rates: Driven by industry supply and demand
Shipping rates in turn are driven by the supply and demand of vessels. Tighter supply, whether driven by higher demand or lower supply, will result in higher rates, while a looser supply and demand balance will lead to lower rates. Global trade is the ultimate driver of demand, which depends on trade volume and trade distance.
Global trade volume affects shipping rates
As the global trade highly correlates with global economic growth and overall demand of commodities, China’s economic growth plays a particularly important role in the shipping industry. Often, movements in commodity prices can tell investors whether economic activity is on the rise or falling. This may suggest important future movements in shipping rates. But investors should also follow shifts in policies and the economics of oil production. These changes can have a negative impact on global trade routes and volume.
Supply: Driven by ship orders, scrapping, and expectations
Ship orders and scrapping activity are the two most influential activities that affect supply, which will in turn affect shipping rates. But expected shipping rates do influence managers’ decisions about whether to purchase or build new ships. New ship deliveries can also increase companies’ earnings.
Shipping rates and orders affect ship price (values)
Finally, the prices (values) of ships are another key indicator that drives stock prices, because one way to measure the value of a company is by its assets. Ship prices are often affected by shipping rates and ship orders. But we can look at rising or falling ship prices as leading indicators that show where future shipping rates will be.
Although these key indicators are often published on different dates of the month and days of the week, we generally compile them into a series so that investors can get a fuller picture of how these key indicators relate to one another. This week, we’ll talk about crude tankers’ orderbook, scrapping activity capacity growth, plus the Baltic Dirty Tanker Index, Baker Hughes’s oil rig count in the United States, and US product oil export. We also show a performance comparison between crude tankers and shipping and the S&P 500 at the end of this series.
Browse this series on Market Realist:
- Part 2 - Why managers are more optimistic long-term about crude tankers
- Part 3 - Why scrapping activity remains negative for crude tankers
- Part 4 - Must-know: Rates for crude tankers still tread at a low level
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- Commodity Markets