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Supply and demand dynamics of crude tankers remain negative

Xun Yao Chen, Industrials Analyst

Shipping stocks must-know: Outperformance and outlook for Scorpio and Navios (Part 2 of 8)

(Continued from Part 1)

Two sub-industries, specific drivers

As we can divide the oil shipping industry into two sub-industries, crude and product tankers, it’s important to understand that there are specific drivers that affect supply and demand separately. Investors and analysts look at supply and demand because they’re two of the most important factors that affect shipping rates, which affects companies’ financial performances. Naturally, the market value of the company’s shares as well.

Oversupply of crude tankers

Based on Clarksons Shipping Intelligence Network’s research, the crude tanker sub-industry will continue to face unfavorable fundamentals this year. New supply, using tonnage capacity, is expected to grow by 3.9% year-over-year, while demand is only expected to grow at 2.5%. New deliveries—which were driven by high profitability and an industry-wide assumption that crude oil shipment would continue to grow as fast as it did in pre-2008—continue to fuel competition, thereby pressuring shipping rates downhill. On the demand side, car sales in China have rebounded, the situation in Europe appears to be less fearsome than it was back in 2012, and the housing market in the United States is once again doing well. But China’s oil restocking activity in 2012 had pulled import growth away from this year, so growth for 2013 will not be as high as it could be.

OPEC vs Non-OPEC Production Growth

Falling OPEC, rising non-OPEC

Further increases in non-OPEC (Organization of the Petroleum Exporting Countries) oil production, primarily led by the United States due to an energy boom supported by technologies called hydraulic fracking and horizontal drilling, are negatively impacting production in OPEC that has historically driven demand for crude tankers as we explained in Part 1. To keep oil prices stable at near $100, in order to maintain high profitability, the OPEC is expected to decrease production by more than a million barrels per day in response to a similar increase in non-OPEC production. Since VLCCs (very large crude carriers) and Suezmax are primarily used to ship oil out members of OPEC that are primarily situated in Africa and the Middle East,  the production decrease has a negative consequence on firms highly exposed to crude tankers.

As we saw in Part 1, these firms include Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Ltd. (TNP), and Nordic American Tanker Ltd. (NAT), which also negatively impacts the Guggenheim Shipping ETF (SEA).

Continue to Part 3

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