An overview of crude tanker industry (Part 9 of 10)
Characteristics of shipping rates
There are a few additional key qualities investors should take note about tanker rates and how they affect stocks. These include the volatile, seasonal and cyclical nature of tanker rates.
The shipping industry’s supply curve is inelastic, because it’s quite expensive to store ships when there is excess supply. It’s also difficult to expand supply due to lengthy construction lead times. Demand is quite fairly inelastic too since shipping oil only cost about $1 to $3 dollars a barrel, fairly small compared to $100 per barrel we see today.
While fluctuation in shipping rates may affect refiners’ choice to use supplies from countries that are closer, thereby reducing transportation fees and demand for tanker, tanker business and global trade is much more dependent on supply and demand for oil rather than on price–factors we mentioned earlier in this series.
The combination of inelastic demand and supply makes shipping rates volatile. Even a small change in demand and supply could send rates skyrocketing and plummeting.
Oil demand and tanker seasonality
Oil demand is also seasonal. Shipments tend to increase towards the last few months of the year, as northern countries import more oil for heating purposes. Thus, investors can expect benchmark rates or index like the Baltic Dirty Tanker Index to rise during the third or fourth quarter of every year.
Playing the seasonality
Unfortunately, investors cannot simply enter shipping companies during the third or fourth quarter to generate quick returns, because everyone knows this. What this means is shipping companies’ performance isn’t highly correlated with shipping rates. What investors should do is to compare or estimate year-over-year growth in shipping rates. However, this may not always be perfect because seasonal increases and decreases can come earlier or later than a normal year just like the first day of snow.
In times when shipping rates are rising rapidly and the market has been caught off-guard, the relationship between shipping rates and companies’ share prices will be stronger over the short to medium term. But there are multiple factors like valuation, technical, market sentiment, rates expectations and macro factors that drive share prices too.
Browse this series on Market Realist:
- Part 1 - Overview and cheat sheet of investing in crude oil shipping industry
- Part 2 - Why is OPEC important to crude tanker’s business
- Part 3 - 3 major groups of importers key to OPEC oil and tanker demand
- Commodity Markets