Democratizing tanker stocks weekly (Part 7: Oil prices)
Continued from Part 6
The single most important indicator that affects tanker companies’ top line revenue is shipping rates. When supply grows faster than demand, it pressures shipping rates. But when supply growth can’t meet demand growth, shipping rates rise. However, there are other factors that make tanker rates rise—such as the price of crude oil.
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Rates drag oil prices higher
One of these indicators that 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 31, the index stood at 624—an increase of 7.59% since the beginning of July.1 Tanker rates have risen lately on the back of higher oil prices, driven by unrest in Egypt that could potentially disrupt oil production fields and shipments, but also because of better economic data worldwide. As a result, tanker rates rose more than the 3.80% increase we saw in oil price during July.
Because tanker firms’ revenues depend on shipping rates, an increase in shipping rates would be positive for revenue. The market has seen the recent rise as a positive and has bid up share prices of tanker stocks as well. However, higher oil prices also drive fuel costs higher, because oil represents a substantial portion of companies’ operating costs (the other major portion is labor). Companies may also be unable to take advantage of the recent rise in rates if they’ve already chartered their ships out, because a single voyage can take up to several weeks. So earnings may not increase by much, a possible negative.
So far, unrest in Egypt hasn’t really caused problems in oil supply. If the price of oil rises higher because of better economic demand, oil demand would be higher, which could slow the decline in U.S. oil imports and benefit tanker rates in the short term. But higher oil prices would be a catalyst for oil companies to increase production, which can happen in the United States or elsewhere in the world—such as the OPEC (Organization of the Petroleum Exporting Countries).
Given that companies are focusing more and more on the United States for incremental production (as we saw in Part 6), oil trade could still be negatively affected over the medium to long term, causing shipping rates to fall. It would then be negative for share prices of tanker firms such as Tsakos Energy Navigation Ltd. (TNP), Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), and Scorpio Tankers Inc. (STNG). This also applies to the Guggenheim Shipping ETF (SEA).
Learn more about indicators that reflect tanker fundamentals
This concludes this week’s tanker update. For additional indicators that drive the performance of tanker stocks, visit our Marine Shipping page. We also highly recommend reading two long-term key drivers and indicators that were part of the series 7 points that reflect tanker fundamentals say recovery isn’t looming published last week: China car sales and oil import (Part 6) and Ship value and vessel price (Part 8).
- The Baltic Exchange also publishes the Baltic Clean Tanker Index, but that tracks refined oil transport rather than crude oil transport. ↩