U.S. Markets closed

Must-know: Why oil tanker rates continued to fall in 2013

Xun Yao Chen

Why oil tankers' recent rally could be sustainable (Part 4 of 9)

(Continued from Part 3)

Lower shipping rates

A poor supply and demand outlook at the beginning of 2013 suggested lower shipping rates ahead for the oil tankers of companies such as Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Teekay Tanker Ltd. (TNK), and DryShips Inc. (DRYS). As shipping rates fall, earnings contract.

Rates continued to slip

During the first six months of 2013, the Baltic Dirty Tanker Index (a benchmark index that reflects the overall price of transporting crude oil) continued to fall. It slipped from roughly 680 at the start of the year to 580 in mid-2013. Year-over-year growth, which somewhat accounts for seasonality, remained in negative territory, with no sign that the downward pressure would go away anytime soon.

Short-term rally

In mid-2013, though, the Baltic Dirty Tanker Index spiked up to touch 650, and year-over-year changes in the Index turned positive. An increase in scrapping activity and few deliveries of new ships, caused by depressed shipping rates, were the main factors that led to a tighter supply and demand balance. Tanker stocks had benefited from the rally.

Quite often, rising scrapping activity reflects weakness in shipping rates. But in cases where companies actively engage in scrapping activity to support shipping rates, scrappage can become a catalyst. Unfortunately, these were only short-term catalysts.  As rates rose, companies had less incentive to scrap more vessels. Subsequently, when rates came down, tanker stocks fell.

Higher consumption didn’t help

While U.S. oil consumption grew throughout 2013, as people drove the most since 2008 and industrial activity picked up, this wasn’t enough to offset declines in U.S. oil imports from OPEC amid rising domestic production. China’s crude oil imports, which tanker companies very much needed in order to offset declines in business with the United States, were still hungover from 2012′s stockpiling activity.

Continue to Part 5

Browse this series on Market Realist: