Supply and demand balance: key driver of shipping rates
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, shipping rates rise, which benefits tanker companies. On the other hand, when demand grows less than supply, shipping rates fall, which hurts companies such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), and Teekay Tankers Ltd. (TNK).
Tanker rates rise, possibly supporting share prices
One indicator investors and analysts use to track the overall price of transporting crude oil across oceans for a single voyage (the spot market) is the Baltic Dirty Tanker Index, published daily by the Baltic Exchange. On July 5, the index jumped to 603 from 577 a week ago. (The Baltic Exchange also publishes the Baltic Clean Tanker Index, but that tracks refined oil transport rather than crude oil transport.) The sudden jump in tanker rates is often driven by short-term fundamentals, which is usually driven by an increase in oil shipping demand rather than supply. This would be positive for tanker companies’ stock prices, as traders may bid these stocks higher in the near term (as we saw yesterday, on July 8, 2013).
Positive or negative?
However, long-term investors may want to be cautious because it’s more likely that this short-term rise—although it may reach higher for a while—will not last, because the long-term trend still remains down. If tanker rates fall, the fall will be negative for investors, who should be following trends on a long-term basis (even though they could be tracking data regularly to make small entries). Those who have experienced an 80% decline in stocks such as Tsakos Energy Navigation Ltd. (TNP), Teekay Tankers Ltd. (TNK), and Nordic American Tanker Ltd. (NAT) know well that fundamentals in the shipping industry have been weak for the last five years, as they were driven by a large number of orders placed before 2008, a globally weak economy, and an energy boom in the United States.
If supply growth outpaces demand growth, the long-term trend of tanker rates will likely come down again. This bodes negatively for companies such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), Teekay Tankers Ltd. (TNK), and Nordic American Tankers Ltd. (NAT). The Guggenheim Shipping ETF (SEA), which invests in several of the companies mentioned earlier, will also be affected.
To see where shipping rates will go, investigate data for U.S. Oil Imports (see US oil imports fall to a record low since 2007, oil shipping (tanker) outlook remains negative) and Capacity Growth (see Tanker capacity grows at elevated 4.15%, negative for oil shipping stocks).
© 2013 Market Realist, Inc.