Brent oil and the Baltic Dirty Tanker Index
Commodity prices and shipping rates are like twins: when prices like oil are rising, they often reflect a faster increase in demand than supply—and higher demand often correlates with trade activity. As vessels like crude tankers can take up to five years to build, they also mean higher shipping rates. Conversely, when prices are falling, they can portray a negative impact on the price of shipping oil across water.
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Strong relationship between Brent oil and BDTI growth
The chart above pits the year-over-year growth in the BDTI (Baltic Dirty Tanker Index), which tracks the average prices of hauling crude oil on representative routes, against Brent oil, the benchmark for crude oil prices. With a correlation of 0.65, you can say there’s a pretty strong positive relationship between year-over-year growth in Brent crude price and the tanker industry over the following month.
Correlation figures closer to 1 show a stronger relationship between the two variables, while figures closer to -1 show a stronger negative relationship. The closer they are to 0, the weaker the relationship becomes.
The Middle East and OPEC are driving production and shipping demand
Throughout much of the 21st century so far, the Middle East (or OPEC—Organization of the Petroleum Exporting Countries) has been the key driver for incremental oil production. As oil prices rose because of demand, OPEC will increase production, since one of its objectives is to ensure efficient, economic, and regular supply of petroleum to customers. That meant increased demand for crude tankers to carry unrefined (crude) oil from the Middle East and Africa to the rest of the world.
On the flip side, when oil prices do fall because of weakening demand, or increased supply in non-OPEC countries (like what we’re seeing now), demand for oil falls. To help protect profitability, members of OPEC will cut production to stop oil prices from falling as much. That means less demand for crude tankers to ship oil out of countries like Saudi Arabia and Nigeria.
How crude prices could move
The year-over-year growth in Brent crude price has moved sideways since July. Since oil prices are now above 2008 levels, it’s unlikely for prices to appreciate much further. More output from the United States and Saudi Arabia will likely keep a ceiling on crude oil prices in the coming months and quarters.
If oil prices do rise higher in the medium to long term, expect Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Nordic America Tanker Ltd. (NAT), DryShips Inc.’s (DRYS) tanker business, and the Guggenheim Shipping ETF (SEA) to benefit. Conversely, if oil prices fall, they will likely reflect a global economic slowdown, which is negative.