In a highly commoditized industry, such as oil shipping (tankers), supply and demand balance is a key driver of shipping rates, which affects revenue, margins, earnings and share prices. When demand grows more than supply does, shipping rates will rise, which benefits tanker companies. On the other hand, when demand grows less than supply, shipping rates will fall.
Depressed tanker rates
One such indicator that tracks the cost of transporting crude oil across ocean is the Baltic Dirty Tanker Index, published daily by the Baltic Exchange. At the end of May, the index stood at 612, down from 619 in April and 661 in March.1
Prices for shipping oil across the ocean have fallen significantly since 2008 as the U.S. began to rely more on domestic oil through technologies called hydraulic fracturing and horizontal drilling, which made it possible to extract oil from geographies that were initially impossible or uneconomical. A weak global economy, driven by debt saddled developed economies and the end of China’s golden investment led economic growth, also contributed to weak import growth of ~3.8% for the world’s top three importers from 2009 to 2012.
To make fundamentals worse, shipping firms placed large orders of new tankers prior to the financial crisis, expecting high growth to continue (see articles on tanker orders under Ship Orders driver for more info). Unfortunately, that did not happen. As supply grew faster than demand did, shipping rates collapsed and several companies went bankrupt.
Negative outlook (short to medium-term)
As oil companies continue their searches for oil in the U.S., oil production is expected to hit another record in 2013 (see article US oil production expected to hit record in 2013, negative for tankers under Global Trade driver for more info). This bodes negative for shipping companies, such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL) and Teekay Tankers Ltd. (TNK)., especially since current data shows excess growth in capacity (see articles on tanker capacity under Fleet Utilization driver for more info). This is also applicable to the Guggenheim Shipping ETF (SEA), which holds positions in all of the companies mentioned earlier.
On a positive note, companies have returned to order new ships, which suggests managers are becoming more optimistic regarding the long-term outlook for the industry (see articles on tanker orders under Ship Orders driver for more info).
© 2013 Market Realist, Inc.
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