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Why a tranquil oil tanker space creates investor opportunity

Xun Yao Chen

Why a tranquil oil tanker space creates investor opportunity (Part 1 of 8)

Crude tankers

Crude tankers are used globally to haul unrefined crude oil across water. It’s a vital industry that facilities trade between countries. The vessels come in three class sizes: VLCCs (very large crude carriers), Suezmax, and Aframax, by order of capacity.

VLCCs are largely employed for long-haul routes because their larger capacity makes them more economical. They’re used for voyages like from the Arabian Gulf to the United States or East Asia. Suezmax vessels are employed on similar routes as VLCCs but are more suited for shorter distances—from West Africa to the United States, for example. Aframax vessels are medium vessels used primarily for shorter distances, from former Soviet Union states to Europe, and from Venezuela to the U.S., for example.

While there might be some price differences in the short term, these tankers are quite substitutable to each other. That means shipping rates tend to follow similar trends over the medium-to-long term.

Uneventful price movements

Although crude tankers as a whole outperformed the broad market—the SPDR S&P 500 ETF (SPY)—towards the end of 2013, they’ve gone nowhere since–so the space is quite uneventful. But at least we’re not seeing large drops. Still, this doesn’t mean fundamentals in the industry aren’t changing. It’s these quiet times that create opportunities to study companies and industries—and to think before we make our next moves.

In this series, we’ll examine some of the key indicators that are currently affecting crude tankers’ fundamentals and companies’ values. But we would caution that investing in shipping companies may not be for everyone due to the volatile nature of day-to-day movements. So for people who can’t handle volatility in crude stocks such as Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), Tsakos Energy Navigation Ltd. (TNP), and Frontline Ltd. (FRO), the Guggenheim Shipping ETF (SEA) is an alternative.

For an overview of the crude tanker industry, please visit Overview and cheat sheet: Investing in crude oil shipping industry.

Continue to Part 2

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