Shipping rates: A leading indicator
The single most important indicator that affects tanker companies’ performance is shipping rates. One widely followed index that tracks the price of shipping crude oil (unrefined oil) across the ocean for representative routes is the Baltic Dirty Tanker Index. Compiled daily by the Baltic Exchange for rates settled in the spot market on a time charter equivalent basis, it’s widely considered a leading indicator due to its timeliness. It often has a significant impact on the share prices of tanker stocks.
Rates are back down again following a short-term rise
On October 1, the Baltic Dirty Tanker Index stood at 586. Overall, the tanker index remains in a downtrend since late 2009, making new lows on every bounce and trough. But it has been trying to find support on the lower range as ship companies scrap vessels. It’s a slow bleed.
The index was climbing higher in July, as demand rose in the United States and shipments to China increased. Fewer new ship deliveries and scrapping activity also helped. However, it was nonetheless a short-term bounce and rates fell in August.
A shift from the downtrend appears to be looming
A shift in trend is something to look out for. The lower bound of the chart shown above represents the rates the industry is trying to support. As rates come down, companies will scrap ships, go bankrupt, cancel new deliveries, or delay deliveries. So, as time passes, the industry comprises a fleet portfolio that can do business at cheaper rates.
The upper bound is the level that companies will try to take advantage of by receiving new ships. A breakout of the downtrend will mean there aren’t enough new ships to keep rates low anymore. If that happens, expect tanker stocks to rise in share prices—similar to what we’ve seen for dry bulk stocks.
Could the worst be over?
On a year-over-year basis, the index appears to be showing some positive development—rising from negative to positive territory in August. While it fell recently, it has stayed above figures seen before this summer. This reflects a smaller increase in excess supply growth on a year-to-year basis.
If year-over-year change can hold up here, then the worst for the crude tankers may be over. This would be long-term positive for crude stocks such as Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Teekay Tankers Ltd. (TNK), and Ship Finance International (SFL). While the Guggenheim Shipping ETF (SEA) is also affected by the crude tanker industry’s fundamentals, the ETF also invests in product tankers and other shipping companies that are performing better.
- Part 1 - Why tanker managers remain negative about crude oil prospects
- Part 2 - Scrappage activity says crude tankers aren’t ready for a bull run
- Part 3 - Falling capacity growth points to a negative crude tanker outlook
- Part 4 - Why the crude tanker industry remains depressed due to low rates
- Part 5 - Why more efficient oil drilling is negative for crude oil tankers
- Part 6 - Why increased US domestic oil is negative for crude oil shippers
- Part 7 - Why the world oil production outlook is negative for tanker stocks
- Part 8 - Why Brazil’s Libra auction is a long-term positive for VLCCs
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