U.S. Markets closed

Why crude tanker rates will stay low, negative for tanker stocks

Xun Yao Chen

Key crude tanker stocks updates, September 9–13 (Part 3 of 3)

(Continued from Part 2)

Shipping rates affect companies’ revenues

The single most important indicator that affects tanker companies’ top line revenue is shipping rates, which influence profitability margins, earnings, and share prices. So traders and analysts often look at shipping rates. Shipping rates generally fall because of looser supply and demand dynamics. On the other hand, shippers can achieve higher shipping rates through tighter supply.

Baltic Dirty Tanker Index 2013-09-17

Rates are back down again following a short-term rise

On September 13, the Baltic Dirty Tanker Index stood at 583, down from 593 on September 6. The Baltic Dirty Tanker Index reflects the shipping rate for moving crude oil (unrefined oil) across the ocean based on representative routes and ship class in the spot market using time charter equivalent rates. Overall, the tanker index has remained in a downtrend since late 2009, making new lows on every bounce and trough.

The index was climbing higher in July because of rising oil prices, which were driven by higher demand for oil in the United States, unrest in the Middle East, and increased shipments to China. Fewer new ship deliveries also helped. In August, the relationship between oil and shipping rates broke down, as the commodity was pushed higher because of Syria woe and supply disruptions in Libya, which don’t exactly help with oil shipments from the Middle East. Global shipments likely fell last week, given that weekly capacity growth was negative.

A simple comment on data patterns

Although I don’t usually comment on patterns, it’s worth mentioning here. The lower bound represents the rates the industry is trying to support. As rates come down, some companies go bankrupt while others retire old ships that are typically more expensive. So, as time passes, the industry comprises a fleet portfolio that can do business at cheaper rates. The upper bound is the level that companies will try to take advantage of by receiving new ships. When you see shipping rates break out of the current downward trend, it means there aren’t enough new ships to keep rates low anymore.

Year-over-year growth remains weak

On a year-over-year basis, the Baltic Dirty Tanker Index appears to be showing some positive movement, rising from negative to positive territory in August. The year-over-year growth has since come down, and it remains to be seen whether it can help itself up from the negative territory. Analysts use year-over-year data to adjust for seasonality.

Crude tanker rates will likely stay depressed

Based on current trends and data from energy associations, though, non-OPEC (Organization of the Petroleum Exporting Countries) production is expected to outpace OPEC production in the next few years (see The dynamics of global oil trade and demand for crude tankers), which is negative for demand of crude tankers—particularly the VLCCs (very large crude carriers).

Shipping companies like Frontline Ltd. (FRO), Ship Finance International Ltd. (SFL), and Nordic American Tanker Ltd. (NAT) will likely have to live with depressed rates for at least the short term—even though they may present a good investment opportunity down the road. Let’s hope rates rise before contracts expire for Navios Maritime Acquisition Corp. (NNA).

Lower rates will also negatively affect the Guggenheim Shipping ETF (SEA), but it also invests in product tankers and other shipping companies that are performing better.

Browse this series on Market Realist: