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Why oil tankers could follow the dry bulk shipping recovery

Why oil tankers could follow the dry bulk shipping recovery (Part 1 of 12)

Could oil tankers follow in dry bulk shippers’ and BDI’s footsteps?

Crude tankers turn around

Crude tankers, used to haul crude (unrefined) oil across water, lagged dry bulk shippers in the first two quarters of 2013. But as we approached the latter half of 2013, some cyclical indicators were showing signs that maybe tankers and shipping rates would bottom out. This would be positive for the Guggenheim Shipping ETF (SEA) and crude tanker companies such as Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), and Tsakos Energy Navigation Ltd. (TNP).

Baltic Dirty Tanker IndexEnlarge Graph

Trend reversal

After several years of falling rates, the trend has reversed. The Baltic Dirty Tanker Index, which reflects the overall cost of shipping oil using tankers in the spot market, climbed from a near-bottom of 600 to ~1,300. As the index rose higher, year-over-year growth, which somewhat accounts for seasonality, became positive.

Tightening balance

Several managers said in their fourth quarter earnings call that the latest volatility we’ve seen is a reflection of improving fundamentals. As managers at Teekay Tankers Ltd. (TNK) noted, “This winter spike is unlike anything we have seen since the financial crisis of 2008 and 2009, and is a reflection of both tightening fundamentals and strong seasonal factors.”

Some of the rate increases were due to seasonality. But as managers at DryShips Inc. (DRYS) said, “The magnitude of the increase shows us that the supply/demand balance is tighter than anticipated.”

Volatility

Most of us dislike volatility. But volatility can be positive in the crude tanker (shipping) business, because it means the supply and demand balance is tight or tightening. See the next part of this series to learn more.

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