Weekly key indicators for tanker stocks (Part 1: Recap and preface)

Overall pull-back in tanker stocks

After weeks of solid performance on the back of higher tanker rates—driven by higher oil prices largely caused by unrest in Egypt, better-than-expected economic data out of the United States, low capacity growth, and U.S. Fed Chairman Bernanke’s announcement that the tapering of quantitative easing will depend on economic growth—tanker stocks pulled back last week.

Tanker Stock Performance 2013-08-05Enlarge Graph

For the first part of the week, July 29 to August 2, tanker stocks have generally pulled back on lower shipping rates, and analysts expect that China’s manufacturing activity will show another decline. Although China’s state manufacturing PMI (purchasing managers index) unexpectedly showed improvements and the country’s initial jobless claim fell to a 5.5-year low on August 1, which lifted tanker stocks, the gain was erased when the United States missed employment numbers.

Upcoming indicator releases

On Friday, key industrial data out of China will give us a better clue as to how the country’s economic activity is holding up, which can have a significant impact on demand for oil shipments. As for earnings, Teekay Tankers Ltd. (TNK) will be announcing its second quarter results before the market opens on August 8, 2013. But first, let’s review some key indicators, published last week, that reflect key supply and demand trends as well as the future prospects of the tanker industry.

Why are supply and demand important?

The supply and demand of ships are the most important factors that affect shipping rates, which in turn affect earnings and share prices in a highly commoditized industry such as shipping. Unlike Samsung and Apple, which have features that set them apart from each other beyond price (think design, versatility, and compatibility), the shipping industry offers little differentiation between companies, so shipping firms rely most on rates. That’s why supply and demand are so important in the industry—they affect shipping rates. When supply growth outpaces demand, competition among shipping firms rises, which leads to lower shipping rates. On the other hand, if supply growth can’t meet demand growth, customers will have to pay higher rates to transport goods across the ocean. The latter case is negative for customers but positive for dry bulk shipping firms, because it increases profitability. Higher profitability will often drive share prices higher.

Continue to Ship orders (Part 2) to learn more about the fundamentals of the shipping industry.