Key crude tanker trends (October 25–30) (Part 4 of 9)
Why follow the Baltic Dirty Tanker Index?
The single most important indicator that affects tanker companies’ performance is shipping rates. One widely followed index that tracks the price of shipping crude oil (unrefined oil) across the ocean for representative routes is the Baltic Dirty Tanker Index. Compiled daily by the Baltic Exchange for rates settled in the spot market on a time charter equivalent basis, it’s widely considered a leading indicator due to its timeliness.
Rates remain low amid pressure
On October 31, the Baltic Dirty Tanker Index stood at 595. Overall, the tanker index has trended downwards, making new lows on every bounce and trough. But it has been trying to find support on the lower range as ship companies scrap vessels of around 580.
The Baltic Dirty Tanker Index rose in July, as demand rose in the United States and shipments to China increased. Fewer new ship deliveries and scrapping activity also helped. The rise in index ignited some excitement among tanker stocks like Frontline Ltd. (FRO) and Nordic American Tanker Ltd. (NAT). However, it was nonetheless a short-term bounce, and the rates that fell in August haven’t recovered yet.
Waiting for the downtrend to reverse
The lower bound of the chart above reflects the rates the industry tries to support. As rates come down, companies will scrap ships, go bankrupt, cancel new deliveries, or delay deliveries. So, as time passes, the industry comprises a fleet portfolio that can do business at cheaper rates.
The upper bound is the level that companies will try to take advantage of by receiving new ships. A breakout of the downtrend will mean there aren’t enough new ships to keep rates low anymore. If that happens, expect tanker stocks to rise in share prices—similar to what we’ve seen for dry bulk stocks.
Rates likely to tread near bottom
With capacity growth coming down sharply and current rates unprofitable for shipping companies, the Baltic Dirty Tanker Index will likely tread sideways above 550: the worst for crude tankers may be over, but rates will likely stay low. Companies that need to pay large interest expenses and are running out of cash quickly could still face bankruptcy or restructuring.
While crude shipping stocks could still face headwinds in the short term, rates aren’t likely to fall much further. If stocks like Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Teekay Tankers Ltd. (TNK), and DryShips Inc. (DRYS) can survive through the short to medium term and when rates rise in the future, investors could see opportunities that are similar to what we’ve seen in dry bulks and product tankers this year.
The Guggenheim Shipping ETF (SEA) is also influenced by fundamentals within the crude tanker industry, although it does invest in other shipping companies like product tankers, dry bulk, LNG (liquefied natural gas), and shuttle tankers—which have all done well as a whole.
Browse this series on Market Realist:
- Part 1 - Key trends investors need to know for the crude tanker industry
- Part 2 - Why managers are more optimistic long-term about crude tankers
- Part 3 - Why scrapping activity remains negative for crude tankers
- Commodity Markets
- crude oil