Strong shipping rates
According to management, Teekay Tankers’ better third quarter 2013 earnings were largely driven by stronger Aframax and Suezmax spot rates, in turn driven by stronger peak summer demand. As some might have noticed, U.S. oil consumption rose, and so did imports. Slightly off its rates gain, the company had to dry-dock three vessels during the quarter, which was more than usual. Dry docking is pulling ships out of the ocean for inspections, maintenance, or repairs.
Late quarter weakness
However, management reports that continued reduction in U.S. crude oil imports due to rising domestic production, fall refinery maintenance, and reduced OPEC supply all contributed to reduced tanker demand. This put downward pressure on rates through the latter half of the third quarter, negatively affecting TNK’s vessels operating in the spot market—a market that charges a fee for transporting a specific amount of goods one time as opposed to fully renting the ship out on a per-day basis.
A weaker start into the fourth quarter
Rates so far for Suezmax and Aframax vessels have been weaker than the third quarter overall, averaging $10,800 a day compared to $13,800 for Suezmax and $10,400 per day versus $13,600 for Aframax.
Factors to drive rates higher
Rates for VLCCs—the largest class of crude tanker—have been increasing in the early part of the fourth quarter, driven by higher Chinese stockpiling and increased refinery throughput ahead of stronger winter demand. Although this should also positively benefit Suezmax and Aframax vessels (since customers often substitute the smaller classes when rates for the larger classes become expensive), renewed disruptions in Libyan production could result in continued downward pressure on Suezmax vessels in the fourth quarter, management said.
Seasonally higher demand for crude tankers and a reboot of refineries could bring overall tanker rates higher towards the end of the year, but this increase could be tempered in the fourth quarter as the U.S. continues to increase its own domestic production, TNK noted.
Essentially, Teekay Tankers is expecting rates to increase, but how much rates will increase is anyone’s guess. Besides, investors and the market often follow year-over-year changes in rates to account for seasonality. So while share prices may rise if rates demand increases, any increase would likely be temporary for TNK and its peers, like Tsakos Energy Navigation Ltd. (TNP), Frontline Ltd. (FRO), and Nordic American Tanker Ltd. (NAT).
If rates do rise significantly, however, they may suggest a more positive development for these companies and the Guggenheim Shipping ETF (SEA). Please note that TNP and a segment of TNK invest in product tankers, which can be influenced by other drivers.