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Tankers and oil prices
Oil prices can sometimes be the leading indicator of oil demand and shipments. Since the beginning of July, tanker companies such as Tsakos Energy Navigation Ltd. (TNP), Teekay Tankers Ltd. (TNK), Frontline Ltd. (FRO), and Nordic American Tankers Ltd. (NAT) as well as the Guggenheim Shipping ETF (SEA) have risen on the back of higher oil prices. Last week, we saw a pull-back as oil prices did as well. But have the long-term fundamentals changed?
Investors expect certain industries within shipping to recover later this year or next year. But are we seeing new developments, such as the supply and demand outlook, that will change the fundamental short-term outlook of the tanker industry? Let’s take a look at last week, the week of July 26, new data releases for:
Why are supply and demand important?
The supply and demand of ships are the most important factors that affect shipping rates, which in turn affect earnings and share prices in a highly commoditized industry such as shipping. Unlike Samsung and Apple, which have features that set them apart from each other beyond price (think design, versatility, and compatibility), the shipping industry offers little differentiation between companies, so shipping firms rely most on rates. That’s why supply and demand are so important in the industry, because they affect shipping rates. When supply growth outpaces demand, competition among shipping firms rises, which leads to lower shipping rates. On the other hand, if supply growth can’t meet demand growth, customers will have to pay higher rates to transport goods across the ocean. The latter case is negative for customers but positive for dry bulk shipping firms, because it increases profitability. Higher profitability will often drive share prices higher.