The Crude Oil Contango Trade Drives Up Tanker Rates

Firms are rushing to secure supertankers in order to profit from growing contango spreads as crude oil prices continue to fall compared to futures prices (see Times Online article).

Frontline (FRO) estimates that about 80 million barrels of crude oil are currently being stored in tankers (see Bloomberg article), with 30-35 very large crude carrier storing 2 million barrels of crude each. Not surprisingly, a rush into the contango trade is causing tanker rates to increase about $75,000 a day. In some cases, shipping rates have fallen over 90 percent within the last year, with crude oil storage rates falling nearly 80 percent.

Teekay (TK) is now trading about $19 a share after coming off its recent low of just below $11, Frontline is trading near $31 a share, after coming off a low of $25 a share, and Overseas Shipping Group (OSG) is trading around $41 a share after a recent low of just over $28 a share in late November.

Drybulk shippers have also seen rates rise recently, as much as 20 percent (see Yahoo!Finance article). DryShips (DRYS) fell to below $4 a share, after reaching $116.43 back in May. The company is currently trading over $15 per share. Diana Shipping (DSX) has come off its low of $6.85 to trade over $12 per share.

Nonetheless, although there are some signs of improvement (see SeekingAlpha article), the contango spread and potential increased demand may not be enough to turn-around the industry, not just yet anyway. Exports from Asia have fallen off a cliff, and will no doubt continue to put pressure on cargo rates, leaving numerous companies at risk of failing. Until global demand begins to increase, or capacity begins to decrease, it may be a little longer before any rally can be trusted with confidence and expected to continue, the contango trade notwithstanding.

Disclosure: None

Comments

[John Cordes:]

Concerning drybulk shippers, it's not the Asian exports erosion that's hurting them, it's the import slow down. Finished goods do not ship on drybulkers and Asia (China) is not exporting raw materials or fertizer.

Jan 19 08:49 AM

[timemachine:]

No disclosure? Why not? It is a waste of time to read comments about any stock(s) withougt full disclosure. I demand it of my investment advisors. I must ask the same of those commenting via the internet.

Jan 19 11:04 AM

[notsosmart:]

the FRO dividends paid for all of my stock in this co.cant beat that.right now yield is still over 6%

Jan 19 11:51 AM

[henarl:]

notsosmart: And if you had been selling covered calls against FRO during 2008 you would have at least doubled those dividends - I did. Long FRO, NAT, OSG.

Jan 19 02:29 PM

[Urbane Gori...:]

Very good point. I listened to an interview of Cosco's CEO about 3 months back. In the interview, he said that their container shipping had improved and was expected to continue to do so. Clearly he was wrong, but at the time, I did not differentiate between container and dry-bulk.... jegan


On Jan 19 08:49 AM John Cordes wrote:

> Concerning drybulk shippers, it's not the Asian exports erosion that's
> hurting them, it's the import slow down. Finished goods do not ship
> on drybulkers and Asia (China) is not exporting raw materials or
> fertizer.

Jan 19 04:41 PM

[notsosmart:]

thanx henarl.just too old for the complicated stuff.

Jan 19 08:11 PM

[Gregorian:]

Well, that can't be a lasting situation. When short and medium term oil contracts are more balanced in a couple of months, this extra demand will vanish.

What could be hoped for however, is a speedup of demolishing/rebuilding single-hull vessels. And a stop in newbuilding orders (Who would lend to that in todyas climate?), but that will take some time to seep through..

Jan 20 06:18 AM

[whisperonth...:]

I'm with notsosmart. I'm happy just collecting the dividends, adding to my shares when the price gets low. I've got FRO, NAT, and jumped into TNK a while back. I'd like to take these up a ways, collect on the dividends, and maybe invest in something less volatile in about 10 years. Until then, bring it on.

Jan 20 11:52 AM

[henarl:]

notsosmart: Well, how old are you? I'm 78. I know selling covered calls takes more attention than just buying, collecting dividends, and hoping to sell at a profit but, at my age, I don't have much else that I need to spend my time on.

Jan 20 02:53 PM

[mpower27:]

I think that he meant that he does not own any of the companies that he is talking about.


On Jan 19 11:04 AM timemachine wrote:

> No disclosure? Why not? It is a waste of time to read comments
> about any stock(s) withougt full disclosure. I demand it of my investment
> advisors. I must ask the same of those commenting via the internet.

Jan 21 01:29 AM

[mpower27:]

I'm curious as to what most of you view as the best play. I personally am looking at NAT, (don't hold any at the moment) due to the higher div payment.

Jan 21 01:30 AM

[31October:]

NAT gives fantastic returns, but avoid NAT, unless you want a bookeeping nightmare. In fact, check any shipper to make sure that they are not considered a Passive Foreign Investment Company. Congress has messed up the tax code to the point that I almost feel sorry for the IRS.

I like GNK or EXM for dry bulk, and VLCCF or OSG for tankers.

(If you are willing to lose the dividend and go for long-term growth, TBSI looks interesting. The dividend is at risk for all shippers this year, anyway [regardless of what people say.])

Re mpower27:
> I'm curious as to what most of you view as the best play. I personally
> am looking at NAT, (don't hold any at the moment) due to the higher
> div payment.

Jan 27 11:04 AM