The rally in tanker stocks caught many people by surprise. As the Baltic Dirty Tanker Index soared to near 1,300, tanker stocks such as Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Ltd. (TNP), and Nordic American Tanker Ltd. (NAT) followed—though not as much.
Part of the rally in tanker rates was due to seasonality. Shipments of oil and tanker demand tend to see a seasonal upswing during the last quarter of the year, as oil use rises to combat the cold weather. Capacity also becomes constrained, as strong wind, heavy snow, and rough seas disrupt routes and slow lifting and discharging cargo at ports. This means charters had to search for replacement tonnage, which drove up rates in the spot market.
This year was particularly frigid. According to Teekay Tankers Ltd. (TNK), the IEA (International Energy Agency) recently said that oil inventories in developed countries fell 1.5 million barrels a day in the fourth quarter of 2013—the steepest quarterly decline since 1999. Consequently, the demand and supply balance was tighter than usual.
A cautious pullback
As Frontline Ltd.’s (FRO) managers reported an improved fundamental outlook and managers’ sentiment turned 180 degrees around from the gloomy days we saw throughout most of 2013, there were two scenarios that could have played out. Shares of these crude tankers could just rallied in a “run-off” scenario—similar to what happened to other shipping stocks such as Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), and Scorpio Tankers Ltd. (STNG) in 2013.
The alternative “wait and see” scenario meant crude tankers would rally along with the Baltic Dirty Tanker Index, but would see a pullback when the Baltic Dirty Tanker Index pulled back after the effect of seasonality ended, leaving tankers to await further confirmation that the industry is indeed improving. The market chose to wait and see.