Tanker order shows stabilizing fundamentals, turnaround possible

Tanker orders are great metrics for long term fundamentals

Tanker orders are useful metrics for reviewing oil shipping company managers’ assessment of long term demand and supply balance. Firms 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, rather than shorter term.

Tanker order shows stabilizing fundamentals, turnaround possible

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Crude tankers on order reverses last week’s loss, back up to 129 ships

On March 15th, the number of crude tankers on order increased by 2 to 129 ships.1 Last week, crude tankers on order fell from 129 to 127, after stabilizing at 128 for four weeks. On the surface, investors may worry whether orders will slip further down, suggesting managers are still pessimistic with the long term outlook. However, a drop from 129 to 127 was caused by an increase in construction activity (see “Tanker orders fall to higher construction, basing continuesfor a more detailed explanation).

Tanker orders are not great for short or medium term fluctuations

While tanker orders do help show what the long term outlook is for the industry, it is not a great indicator for the short or medium term fluctuations. Even though the number of crude tankers on order has begun to form a base, pointing to a potential reversal, some companies like Frontline Ltd. (FRO) and Teekay Tankers Ltd (TNK) have continued to fall and underperform on the broad market (S&P 500) due to company specific fundamentals. On the other hand, companies such as Knightsbridge Tankers Ltd. (VLCCF) and Nordic American Tanker Ltd. (NAT) have faired better.

ETFs are good tools for reducing company specific risks

To reduce exposure to company specific fundamentals, investors or analysts can use the Guggenheim Shipping ETF (SEA), which has been performing quite well since November 2012, outperforming several other industries, such as steel and coal. The ETF is well diversified in 20 large global shipping companies and pays a dividend yield of 3.01% as of March 18th of 2013.

  1. Tankers on order records the number of ships orders that have been placed but have not gone into construction.

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