Factors to Consider When Investing in Crude Tankers
Due to the capital-intensive nature of the tanker business, crude tankers tend to have high debt levels on their balance sheets. In lean times when contango narrows, it will likely result in value destruction.
Recent events such as rising US production and the Iran nuclear deal have added to the oil glut. Contango is currently at $8.50 per barrel, which makes it an attractive trade for speculators and arbitrageurs.
Oil tankers have outperformed shipping peers, generating in excess of 50% year-to-date on a total return, or price return plus cash returns, basis.
The US energy sector hoped for a rebound in April 2015, when oil rose to $60. Given the recent drop to $40, the mood in the industry seems somber.
Chevron (CVX) reported earnings of $571 million for 2Q15 compared to $5.7 billion in the prior year’s corresponding quarter.
ExxonMobil (XOM), one of the largest US oil companies, reported 2Q15 earnings last Friday, which were the firm’s lowest earnings in more than five years.
Oil drillers in XLE, represented by firms such as Diamond Offshore Drilling (DO) and Transocean (RIG), posted gains last week.
There was a fall of more than 25% in the net long position held in WTI crude oil for the week ended July 21, 2015.
According to data from the U.S. Energy Information Administration, US crude production dropped to 9.4 million barrels per day in the week ended July 24.
Several exploration and production firms within the Energy Select Sector SPDR Fund (XLE) have RSI values of less than 30, implying that they are possibly oversold.
The stock buoyancy of shale oil drillers such as EOG Resources (EOG) suggests investors are betting on an oil and gas rebound.
The storage and transportation subsector within XLE rose by 0.66% during the week. Spectra Energy (SE) and Kinder Morgan (KMI) were the best and worst performers, respectively, in this subsector.
So far this year, institutional investor 13F filings reveal increased allocations toward C.H. Robinson Worldwide (CHRW) and Landstar System (LSTR).
The state of the trucking industry provides a good basis for assessing the health of the economy, as motor carriers move over two-thirds of freight transported in the US.
Over the last week, air freight and courier service providers registered the largest gains among subindustry groups within the iShares Transportation Average ETF (IYT).
ETFs tracking the performance of the transportation sector in the US, namely the iShares Transportation Average ETF (IYT) and the SPDR Transportation ETF (XTN), rose over the last week.
Russia and Saudi Arabia will have to offer more competitive prices in order to maintain market share in China. This implies that the Saudis may cut prices soon for crudes to Asian refiners.
Oil giant Royal Dutch Shell reported a 2Q15 profit of $3.4 billion, a 33% fall from $5.1 billion over 2Q14 using a current cost of supplies basis.
BP has reported a 2Q15 loss of $5.8 billion. The company attributed the losses to charges involved in the Gulf of Mexico oil spill in 2010 and low crude oil prices.
According to Bloomberg, there was a 34% fall in small-cap shares over the past three months. The stocks saw a 24% fall since June 26, a series of losses over four straight weeks.
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