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New orders and construction activities rise for crude shipment, outlook positive

Tanker orders often reflect what oil shipping company managers’ expectations of future supply and demand are. Managers will often place new orders when future demand is expected to increase more than supply, given that they can generate profit with new tankers. Since tankers can take up to five years to construct, the metric is often more relevant to long term investment horizons.

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Manager(s) placed new order for crude tanker for week ending March 22nd

For the week ending March 22nd, the number of crude tankers on order rose from 129 to 130 ships. For the past few weeks, the number of tankers on order has seen some stabilization around 128 ships as managers took advantage of the record low vessel prices and China’s economic activity continues to improve. Although China’s economic activity grew less than January in February due to the Lunar New Years, a sub-indicator of the purchasing managers’ index showed very optimistic sentiment among business managers (see “Despite lower activity, Chinese managers are optimistic“).

Construction activity rises on top of new orders

Furthermore, the number of ships under construction rose from 43 to 44. When orders go into construction, the number of orders will fall if no new orders are placed. Thus, this week’s rise in the number of tankers under construction and on order suggests managers are becoming more optimistic about future supply to demand balance.

New orders and construction activities support crude tankers

While day rates, the rates at which ships are rented out for transporting goods, will increase once the new vessels come online, it is generally acknowledged within the manufacturing industry that firms are often slow to adjust to changes in demand. Therefore, the price of transporting oil will increase in the meantime, which will benefit tanker stocks such as Frontline Ltd. (FRO), Nordic American Tankers Ltd. (NAT) and Teekay Tankers Ltd. (TNK). As tankers make up 40% of the global shipping industry’s revenue, the Guggenheim Shipping ETF (SEA), which invests in large shipping companies worldwide, will also benefit over the long term.