Shipping rates affect companies’ revenues
The single most important indicator that affects tanker companies’ top line revenue is shipping rates, which influences profitability margins, earnings, and share prices. So traders and analysts often look at shipping rates. Shipping rates generally fall because of looser supply and demand dynamics. On the other hand, shippers can achieve higher shipping rates through tighter supply.
Rates are back down again following short-term rise
On September 6, the Baltic Dirty Tanker Index and Baltic Clean Tanker Index stood at 593 and 580, respectively. The Baltic Dirty Tanker Index reflects the shipping rate for moving crude oil (unrefined oil) across the ocean based on representative routes and ship class in the spot market based on time charter equivalent rates. The Baltic Clean Tanker Index, on the other hand, reflects the shipping rate for moving refined oil over water.
The two indexes were climbing in July because of higher oil prices, which were driven by higher demand of oil in the United States, unrest in the Middle East and increased shipments to China. Fewer new ship deliveries also helped. In August, though, the relationship between oil and shipping rates broke down as the commodity was pushed higher because of Syria woe and supply disruptions in Libia, which do not exactly help with oil shipments from the Middle East. Global shipments likely fell last week, given that capacity growth was negative.
Product tankers outperforming crude tankers
On a year-over-year basis, the Baltic Clean Tanker Index outperformed the Baltic Dirty Tanker Index for most of the first half of the year, reflecting much favorable supply and demand dynamics for product over crude tankers. Year-over-year growth improved for crude tankers since May because of fewer supply deliveries and increase in oil imports and demand.1 Analysts use year-over-year data to adjust for seasonality.
Crude tanker rates likely to see downside
Based on current trends and data taken from energy associations, non-OPEC (Organization of the Petroleum Exporting Countries) production is expected to outpace OPEC production in the next few years (see The dynamics of global oil trade and demand for crude tankers). This is negative for VLCCs (very large crude carriers). The billionaire shipping tycoon John Frederiksen also recently said, “I do not see any special things before at least another couple of years. At least for the crude oil tankers.” Product tankers, on the other hand, are seeing better fundamentals despite higher capacity growth as the United States increases product oil export to Latin America.
Unless we see a change, the current trend remains positive for Tsakos Energy Navigation Ltd. (TNP), Scorpio Tankers Ltd. (STNG), and Navios Maritime Acquisition Corp. (NNA), which focus on product tankers. Frontline Ltd. (FRO) and Nordic American Tankers Ltd. (NAT) may have to live with depressed rates for at least the short term—even though it may present a good investment opportunity down the road.
The Guggenheim Shipping ETF (SEA) will also be negatively affected by lower tanker rates, but it also invests in product tankers and other shipping companies that are performing better.
- Our previous charts were formulated incorrectly and investors should disregard any analysis associated with incorrect data. ↩
- Part 1 - Why ship orders affect tanker companies’ share prices
- Part 2 - Why current capacity growth is negative for tanker companies
- Part 3 - Why crude tanker rates will likely stay low in later half of 2013
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