U.S. Markets closed

Why the Baltic Dirty Tanker Index shows investors must be patient

Xun Yao Chen

Why a tranquil oil tanker space creates investor opportunity (Part 2 of 8)

(Continued from Part 1)

Baltic Dirty Tanker Index

To assess the revenue and earnings potential of the crude oil shipping industry, analysts and money managers often follow the Baltic Dirty Tanker Index. How the Baltic Dirty Tanker Index performs, especially its year-over-year growth, is one factor that has significant implications for Tsakos Energy Navigation Ltd. (TNP), Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), and the Guggenheim Shipping ETF (SEA).

Explaining December’s jump

Since shooting from just 600 to 1,200, the Baltic Dirty Tanker Index came back down to ~680 on March 13, 2014. This volatility reflects tighter fleet utilization, and it’s a sign that the crude tanker industry may be in for a turnaround after facing the worst period over the last five years.

While seasonality played a major role, frigid cold weather also negatively affected operations and supply, which caused rates to rise higher. Demand fundamentals were also supportive, as China imported more crude oil from West Africa and South America for diversification purposes, which increased voyage travel distance. Plus, global oil consumption was also stronger on the back of improved global economic growth.

Mild sideways movements

Although the Baltic Dirty Tanker Index recently turned up, in mid-March of 2014, it has been relatively weak. Since bottoming at ~676, it rose to ~711, and then fell to 691 on April 2, 2014. If rates continue to remain weak over the next few weeks, crude tanker stocks and the Guggenheim Shipping ETF (SEA) aren’t likely to see higher share prices.

However, on a year-over-year basis, the index is up 4.88%, higher than the 2.43% we saw on March 3, 2014. Positive yearly growth means rates are above what they were during the same period last year. Analysts use this as a quick and dirty way to adjust for seasonality. As long as the yearly growth remains positive, crude tankers find support.

Continue to Part 3

Browse this series on Market Realist: