Why oil tankers' recent rally could be sustainable

Why oil tankers' recent rally could be sustainable (Part 1 of 9)

Are oil tankers finally catching up with other shipping stocks?

Bottoms in 2013

2013 was the year product tankers and dry bulk ships bottomed. As a result, the Guggenheim Shipping ETF (SEA) bounced from about a year of stagnation. Yet the shipping industry and the ETF didn’t outperform the S&P 500—often considered the benchmark of the overall market—and had even lagged the first eight months.

Crude Tanker PerformanceEnlarge Graph

Unequal or uneven recovery

While overall shares of product tankers, dry bulk shippers, and crude tankers rose, the increases didn’t occur at the same time. Product tankers were the first to rise, with companies like Scorpio Tankers and Navios Maritime Acquisition outperforming their marine shipping peers. Although some dry bulk shipping stocks like Navios Maritime Holdings and Diana Shipping rose during the first half of 2013, dry bulk shippers as a whole didn’t appreciate in price until the Baltic Dry Index really soared in late summer.

The underperformance of crude tankers

It wasn’t just the dry bulk shippers that dragged down the performance of the Guggenheim Shipping ETF (SEA) during the first eight months. Crude tankers performed worse for most of 2013, as the Baltic Dirty Tanker Index (an index that reflects the general price of moving goods) continued to trickle lower. The market was pessimistic about the industry’s future outlook based on expectations of a continued slump in U.S. crude oil imports (led by surging shale oil production), and significant newbuild deliveries. Market Realist even outlined seven key indicators that suggested recovery for crude tankers wouldn’t be happening soon in mid-summer.

A surprise rise in crude tanker rates

Over the last few months, however, we’ve seen the Baltic Dirty Tanker Index soar to levels unexpected by the market—even taking out the highs of 2010 and 2011. As the index soared, crude tanker stocks such as Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Ltd. (TNP), and Nordic American Tanker Ltd. (NAT) started to run. Does the recent rally have legs and support from long-term fundamental changes? It might. To help investors understand the overall picture, we’ll go back in time first.

To learn more about the volatility of crude oil tanker rates, see the Market Realist article Tanker rates are volatile and seasonal, but should you play them?

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