* "We believe a 25% increase in tanker equity values since early June versus essentially no change in the Standard & Poor's 500 index reflects shipping strength to date, but has not fully priced in further upside over the next six months."
* "We believe the forward six-month outlook could exceed consensus by 40% and support further equity value increases from 10% to 20%."
* "September hurricane activity will likely help shape the direction of shipping rates over the near term since the appearance or absence of hurricanes affects not only shipping traffic but also the continuing trend for U.S. oil refiners to carry high oil inventories and demand more oil from overseas."
On September 2nd Elliott Gue, Editor of The Energy Letter, highlighted that tankers have been one of the best-performing groups in the energy space this summer and finds out that the tanker industry is this year doing better than last year, as tanker rates are running much higher this year than last year (see chart below).
The seasonality in tanker rates is obvious. Note, in particular, the spikes, which occur at the end of each year and the beginning of the year. These spikes represent the seasonal effect. Demand for tankers is highest in the first and fourth quarters. Therefore, spot tanker rates are also highest in these quarters. During the summer months, day-rates reach their lows. Tanker firms often use this seasonally slow period to repair their ships or perform upgrades. After all, it makes sense to take your ships offline when there's little demand.
On the demand side, China has currently the biggest impact on charter rates, as China is a huge oil importer, and hauling all that oil from the Middle East means hiring out more tankers. According to the International Energy Agency [IEA], Chinese oil demand grew by 2.6 percent in 2005 and will grow by 6.1 percent in 2006 and 5.5 percent in 2007. The chart below reveals that in July Chinese oil imports unexpectedly fell by 3.9%, but rebounded strongly in August with a year over year [yoy] increase of 34.9%.
On the supply side, one factor overhanging the tanker group last year was the idea that a big chunk of new ships being built would be delivered during the next few years, leading to a glut of tankers. But other factors are mitigating this effect. Older tankers are being scrapped and retired; all single-hull tankers are being phased out. Notably, BP has decided to only lease out the most modern tankers (double hulls) going forward; this decision was made years ahead of the official deadline for phasing out single hulls.
Moreover, tankers have been pressed into other duties. Some are being refitted as floating production platforms, and others are being used as temporary storage facilities in the Middle East and Asia where storage capacity is lacking. If a tanker becomes a production platform, it's no longer a part of the global tanker supply.
The weekly chart below shows that the leading shipping stocks, Frontline (FRO), General Maritime (GMR), Nordic Amer. Tanker (NAT), OMI Corp. (OMM), Overseas Shipholding (OSG), Tsakos Energy Navigation (TNP) and Knightsbridge Tankers (VLCCF) have on average lost 12.5% since their 52 week high in August.
If tanker stocks are getting support at their 100 day moving average at around 36, and shipping rates will be above average in the coming months, tanker stocks should rebound strongly and make new 52 week highs by the end of the year.
Disclosure: The author has long positions in FRO, GMR, OMM, OSG, TNP and VLCCF.