Managers continue tanker purchases, but outlook remains negative

Orders for crude tankers often reflect shipping companies’ expectations of future supply and demand. Managers often place new orders when future demand is expected to increase more than supply, on the condition that they expect to generate profit with the investment. Since tankers generally take more than two years to construct (sometimes up to five years), the metric is often more relevant to long-term investment horizons.

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June 7th update

For the week ending June 7th, the number of crude tankers on order rose to 6.71% of existing vessels from 6.45% for the prior week. Crude tankers on order have begun basing a year ago as shipping companies returned to the market to place new orders in anticipation of a supply shortage in the long-term. Since managers are often slow to adjust to changes in demand and the short run supply curve is inelastic (ships take time to construct), we can expect shipping rates for transporting crude oil across ocean to rise in the future from current depressed levels.

The crude tanker orderbook, which includes tankers under construction, also rose higher, increasing from 10.30% as percentage of capacity in deadweight (DWT)1 at the end of May to 10.41% for the week ending June 7th. Investors look at the orderbook because it provides additional data that reflects when managers believe they will be able to generate maximum economic profits from their investments.

While it is positive to see the orderbook stabilizing after falling for most of this year, construction activity continues to fall, which suggests most of the increase in orderbook was driven by increases in the number or orders placed, and that managers are in no rush to receive new ships.

Short to medium-term risk remains

As crude tankers take around two to five years from the placement of order till delivery, orders for crude tankers is an indicator most suited for long-term investment horizons. Managers are in no rush to receive new ships because global oil trade growth is expected to remain stagnant over the next couple of years as the U.S increases its own domestic oil production (see US oil production expected to hit record in 2013, negative for tankers under Global Trade for more info) and supply growth remains elevated (see articles on tanker capacity under Fleet Utilization for details).

Current data suggests tanker companies, such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL) and Teekay Tankers Ltd. (TNK), should do well in the long run. However, short to medium-term risks remain and global oil trade is expected to remain stagnant as the U.S. increases its own domestic production, which is negative for shipping rates (for info on current tanker rates, also a key driver, visit Shipping Indexes). This will also affect the Guggenheim Shipping ETF (SEA), which holds positions in the four companies mentioned earlier, as well as other large shipping companies.

  1. DWT is a weight measurement of the amount that a ship can safely carry across ocean