Tanker stocks weekly analysis August 5–9

Part 9

Why shipping rates fell and will likely remain depressed

Shipping rates

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. Other factors that make tanker rates rise include the price of oil and labor.

Tanker Rates and Crude Oil 2013-08-13Enlarge Graph

Oil prices drag rates higher

One of these indicators that investors and analysts use to track the overall price of transporting crude oil across the ocean for a single voyage (the spot market) is the Baltic Dirty Tanker Index, published daily by the Baltic Exchange. Throughout July, the index rose from 580 to 624 on the back of higher oil prices—an increase of 7.59% since the beginning of July. Since then, tanker rates have pulled back slightly with oil.

Although oil prices are often a leading indicator of higher oil demand, part of the increase was due to unrest in Egypt, which means companies were passing on the higher fuel cost to customers. While this may result in higher revenues, it is unlikely to benefit earnings by much. Plus, 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.

Baltic Dirty Tanker Index 2013-08-12Enlarge Graph

Rates will likely remain depressed

While better economic growth outlook and weaker capacity growth also helped push oil prices and shipping rates higher, it’s more likely than not that rates will come down again because of continuous growth in U.S. (non-OPEC) production and higher supply growth, as we’ve seen in earlier parts of this series. In a recent piece by Reuters, the billionaire shipping tycoon John Frederiksen said, “I do not see any special things before at least another couple of years. At least for the crude oil tankers.”

Tanker companies such as Tsakos Energy Navigation Ltd. (TNP), Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT) and Frontline Ltd. (FRO) may have to live with a depressed market—at least over the medium-term. This also applies to the Guggenheim Shipping ETF (SEA).

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