<

Why oil price is a key driver of tanker stocks

Crude Oil Price 2013-06-25Enlarge GraphTanker stocks tied to oil prices

Tanker stocks often move in tandem with oil prices in a demand-driven market. Because tanker companies also use crude oil to run their ships, a price increase in oil due to supply shocks, such as political disruptions in the Middle East, is often negative for tanker firms. As tankers transport oil across the world’s oceans, oil demand is a key driver that affects tanker companies’ earnings and share prices. To get a sense of oil demand, traders and investors often look at the price movements in oil price. When demand is increasing, or expected to increase, oil prices have historically tended to rise as well. But when demand falls, oil price will fall.

Higher dollar, lower oil

On June 20, 2012, oil prices fell 374 basis points (down 3.74%) to $102.15 per barrel. Ben Bernanke, the chairman of the Fed, said that the U.S. central bank will gradually wind down its asset purchases if the economy continues to improve. As asset purchases increase money supply, which often leads to inflation, fewer asset purchases mean lower money supply growth and lower inflation rate in the future. As you might know, inflation erodes the value of a currency. Thus, lower future inflation is positive for the U.S. dollar because it makes the dollar much more valuable relative to other currencies, other things being equal. Because oil trades using the U.S. dollar, a higher U.S. dollar means lower oil prices. This is because a higher U.S. dollar deters companies that operate with non-U.S. currencies from purchasing more oil if U.S.-denominated oil price doesn’t change, as it becomes expensive, which in turn reduces demand of oil and its price.

Developing markets and trade

The Fed’s asset purchase program affects developing markets because borrowers have been using record-low U.S. interest rates to fund investments in developing countries over the past few years, which adds to economic growth. (Investment is part of the calculation within gross domestic product, GDP.) Because the end of the asset purchase program will push the dollar up, which may lead to lower investment returns, the Fed is enticing borrowers to move some money back from developing countries. Although this would be negative for developing countries, a higher dollar would mean cheaper imports for people in the U.S., which may support developing countries’ exports.

Furthermore, a winding down of asset purchases will suggest a better U.S. economy, which is positive for oil demand. Thus, the net effect on demand may end up being zero, which means shipping rates will stay at current levels, other things being equal, and tanker stocks such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), and Teekay Tankers Ltd. (TNK), as well as the Guggenheim Shipping ETF (SEA), may see sideways action over the next months.

However, the price of oil also fell because of uncertainties regarding China’s financial system, which may concern investors more.

To learn more about how tanker stocks relate to oil prices, continue to Must-read: Financial woe abroad drags tankers down, outlook negative.

The Realist Discussions