Supply and demand balance: key driver of shipping rates
In a highly commoditized industry such as oil shipping (tankers), supply and demand balance is a key driver of shipping rates, which affects revenue, margins, earnings, and share prices. When demand grows more than supply, shipping rates rise, which benefits tanker companies. On the other hand, when demand grows less than supply, shipping rates fall, which hurts companies such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), and Teekay Tankers Ltd. (TNK).
Tanker rates continue to fall
One indicator investors and analysts use to track the overall price of transporting crude oil across oceans for a single voyage (the spot market) is the Baltic Dirty Tanker Index, published daily by the Baltic Exchange. On June 28, the index stood at 577, down from 584 the prior week and 612 at the end of May. (The Baltic Exchange also publishes the Baltic Clean Tanker Index, but that tracks refined oil transport rather than crude oil transport.)
Prices for shipping oil across the ocean have fallen significantly since 2008, as the U.S. began to rely more on domestic oil through technologies called “hydraulic fracturing” and “horizontal drilling,” which made it possible to extract oil from areas where extraction was initially impossible or uneconomical. A weak global economy—driven by debt-saddled developed economies and the end of China’s golden investment-led economic growth—also contributed to weaker import growth of ~3.8% for the world’s top three importers from 2009 to 2012.
Rates have also collapsed because shipping firms placed large orders of new tankers prior to the financial crisis, expecting high growth to continue. Unfortunately, that high growth didn’t happen. As supply grew faster than demand, shipping rates collapsed, and several companies went bankrupt. On a positive note, companies have returned to order new ships, which suggests managers are becoming more optimistic regarding the long-term outlook for the industry (see articles on tanker orders under the Ship Orders driver for more information).
Negative outlook (short to medium term)
As oil companies continue their search for oil in the U.S., oil production is expected to hit another record in 2013 (see Oil rig activity stays high, negative for oil shipping under Global Trade). This foreshadows negative developments for shipping companies, such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), and Teekay Tankers Ltd. (TNK)—especially since current data shows excess growth in capacity (see Shipping capacity growth drops but outpaces demand, negative for tanker stocks). This negative prediction also applies to the Guggenheim Shipping ETF (SEA), which holds positions in all the companies mentioned.
Investors should review other drivers to see what’s currently moving the tanker shipping industry. Some must-reads include Must-read: Financial woe abroad drags tankers down, outlook negative, Why oil price is a key driver of tanker stocks, Research shows China’s soaring housing prices actually support tanker firms, and Overall housing prices are becoming cheaper for Chinese, positive for tankers.
More From Market Realist
- Shipping recovery continues with additional purchases, long-term opportunity
- US oil production expected to hit record in 2013, negative for tankers
- Dry bulk shipping at inflection point, order trend remains positive