Shipping Stocks Gain Steam as Fundamentals Improve, Other Factors Fall Into Place

Shipping stocks gained strength over the last few weeks as their fundamentals continue improving. The weekly chart below shows that the leading shipping stocks, Frontline Ltd. Adr (FRO), General Maritime Corp. (GMR), Nordic Amer. Tanker Ship (NAT), OMI Corp. (OMM), Overseas Shipholding Grp. (OSG), Tsakos Energy Navigation (TNP) and Knightsbridge Tankers (VLCCF) have risen both in absolute terms and relative to the S&P 500 over that time.

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The Baltic Dirty Tanker Index [BDTI] and the Baltic Clean Tanker Index [BCTI] which measure the dayrates for tankers have been rising since June 2006. The BDTI index, which measures the costs of hiring ships able to transport crude, rose 10.2 per cent last week, and is 42.8 per cent higher than last year. The index is up by an even sharper 51 per cent from April lows. The BCTI has been rising since April and is currently 45 per cent higher than last year and 68 per cent above March lows.

However, the movement in dayrates can be attributed to the time of year, as day rates tend to rise between August and November to meet winter heating demand. Nevertheless, as Ole-Rikard Hammer, analyst at the Norwegian shipping broker PF Bassoe noted, the shipping market was enjoying an unusually strong summer run even before the Prudhoe Bay news:

From a shipping perspective, growth in oil demand has proved much stronger than expected, and we have also seen the increase in fleet capacity take a breather this year, with few VLCCs coming to market in 2006.

China’s oil demand growth has risen by an estimated 6.1 percent this year, significantly above the level for last year´s 2.6 percent. Chinese imports of crude oil and related products from overseas suppliers rose 20% year over year in the first quarter of 2006 (Source: IEA).

The shutdown of production at Prudhoe Bay oilfield in Alaska caused shipping rates to jump higher as BP (BP) was inquiring about the availability of a wide range of ships from the Middle East, the Gulf, West Africa, the Mediterranean and the Caribbean (Source: FT). Analysts predict it would require 12 VLCCs to transport crude from the Gulf or West Africa to fully meet Prudhoe Bay’s 400,000 barrels of daily production over a 60-day period. Given the fact that currently, the worldwide fleet of VLCCs consists of 465 ships, the uncertainties of Prudhoe Bay’s shutdown could additionally tighten the tanker market in the coming months, beside the high Chinese oil imports.