China’s crude oil import: The most important factor
An indicator that has a first-degree (direct) influence on tanker rates is China’s crude oil import volume. When import volume rises, more tankers will be in use, which pushes up shipping rates. Conversely, lower import volume means an increased number of idled ships, which leads to increased competition. Increased competition will pressure shipping rates and negatively affect the revenues, earnings, cash flow, and share prices of tanker stocks.
Crude oil imports fell in August
In August 2013, China had imported only 5.17 million barrels of crude oil a day—a sharp decline from July’s amount of 6.29 million barrels and reversing any July gains from June. The country’s import is now below the long-term trend line from 2008. Analysts and investors use trend lines to adjust for short-term noise as well as economic cycles. When imports are significantly below the trend line, as they were in 2009, you can expect oil imports to increase on the condition that the historical trend will continue. The disadvantage of using this tool is that if some fundamentals change, they alter future growth compared to the past.
Crude oil imports haven’t grown much since 2012
The above chart shows that oil imports have generally trended with China’s overall economic growth. Oil import growth started to fall in 2011, as China started to cool after high inflation driven by record stimulus in 2009 prompted the government to raise interest rates.
But notice that crude oil imports picked up momentum in the first half of 2012, with imports holding above the long-term trend line due to stockpiling activity despite softening economic growth. As a result, the government’s action to support economic growth during the latter half of 2012, which followed through into 2013, didn’t translate into higher imports growth because most of the recent growth was pulled earlier in 2012.
How China’s crude oil import will affect tanker demand and rates
August’s data has negatively impacted crude tanker rates, but it remains a bright spot because if the long-term trend line has yet to shift, China will likely import more oil in the coming months. However, oil shipment to China will likely have to average more than 6.7 million barrels a day through the end of the year to offset projected declines in US crude oil imports estimated by the EIA (Energy Information Administration) for this year. As China’s economic growth surge upward is nowhere in sight, shipping rates would likely remain depressed in the short and possibly medium terms. This bodes negatively for Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), and Teekay Corp. (TK). To a lesser extent, the Guggenheim Shipping ETF (SEA) will be negatively affected as well.