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Tanker Stocks Still Facing Rough Waters
It's a well-known fact that oil tankers can't turn on a dime. Their massive size simply makes that impossible. But a dramatic about turn in one analyst's view of the shipping sector - from bearish to strongly bullish - recently raised hopes that the group's fortunes could now be entering more favorable waters.
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Buying Surge In Tanker Shares
According to Jefferies & Co analyst Douglas Mavrinac, major crude oil shippers like North American Tanker Shipping (NYSE:NAT), Overseas Shipholding (NYSE:OSG) and Frontline (NYSE:FRO) all now warrant a "Buy" rating after they previously expected to underperform. That prompted a flurry of buying in these names, lifting share values by about 10% on average.
Oil Demand Predicted to Rise
The investment thesis underlying this sudden shift in sentiment is two-part. The first part assumes that global economic growth will remain on track throughout 2010, prompting OPEC to boost production levels throughout the year. That, in turn, should prompt a pick-up in demand for crude tankers just as the tanker fleet is set to shrink due to the mandated demolition of all single-hulled tankers by the end of 2010. That's the second part. The net effect of all this should be surge in spot-market lease rates to the benefit of the previously mentioned companies, all of which are highly leveraged to spot market rates.
Unwinding of Oil Contango Trade Likely To Swamp Tanker Market
As plausible as this scenario sounds, it appears to overlook ongoing developments that threaten to sink spot lease rates instead of lifting them. The recent jump in crude prices, due to the colder than normal winter weather across the U.S. and Europe, has prompted a scramble to offload much of the crude oil that speculators have been storing on huge tanker ships.
Since late 2008, big players in this market like Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (NYSE: MS) have reaped sizable profits playing the oil market contango; a situation where the price of oil for future delivery exceeds the current price by a wide enough margin to warrant paying to lease tankers to store the oil. (Learn more about contango in Contango Vs. Normal Backwardation.)
Lately, however, that margin has been narrowed drastically, prompting a rush for the exits. With a record 6% of the global tanker fleet tied up in this trade, a serious supply glut looms once these ships are unloaded. That could prompt as much as a 25% plunge in lease rates according to a survey of shipping analysts, traders and brokers. That would bring an enormous amount of pain to the shippers as current lease rates are only at the break-even point for many operators.
The Bottom Line
From time to time an individual analyst will try their luck by stepping well outside the consensus view and "swing for the fences" with a particularly gutsy call. That's basically what's happening here. Unfortunately, the weight of the evidence suggests that the consensus may have it right in this case.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Buying Surge In Tanker Shares
According to Jefferies & Co analyst Douglas Mavrinac, major crude oil shippers like North American Tanker Shipping (NYSE:NAT), Overseas Shipholding (NYSE:OSG) and Frontline (NYSE:FRO) all now warrant a "Buy" rating after they previously expected to underperform. That prompted a flurry of buying in these names, lifting share values by about 10% on average.
Oil Demand Predicted to Rise
The investment thesis underlying this sudden shift in sentiment is two-part. The first part assumes that global economic growth will remain on track throughout 2010, prompting OPEC to boost production levels throughout the year. That, in turn, should prompt a pick-up in demand for crude tankers just as the tanker fleet is set to shrink due to the mandated demolition of all single-hulled tankers by the end of 2010. That's the second part. The net effect of all this should be surge in spot-market lease rates to the benefit of the previously mentioned companies, all of which are highly leveraged to spot market rates.
Unwinding of Oil Contango Trade Likely To Swamp Tanker Market
As plausible as this scenario sounds, it appears to overlook ongoing developments that threaten to sink spot lease rates instead of lifting them. The recent jump in crude prices, due to the colder than normal winter weather across the U.S. and Europe, has prompted a scramble to offload much of the crude oil that speculators have been storing on huge tanker ships.
Lately, however, that margin has been narrowed drastically, prompting a rush for the exits. With a record 6% of the global tanker fleet tied up in this trade, a serious supply glut looms once these ships are unloaded. That could prompt as much as a 25% plunge in lease rates according to a survey of shipping analysts, traders and brokers. That would bring an enormous amount of pain to the shippers as current lease rates are only at the break-even point for many operators.
The Bottom Line
From time to time an individual analyst will try their luck by stepping well outside the consensus view and "swing for the fences" with a particularly gutsy call. That's basically what's happening here. Unfortunately, the weight of the evidence suggests that the consensus may have it right in this case.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eugene Bukoveczky
Contributor - Investopedia Advisor
Eugene Bukoveczky is a freelance writer for Investopedia.com. He holds a Chartered Financial Analyst (CFA) designation and has broad experience in investment research and portfolio management. He has traveled extensively during his career, working in Toronto, New York, London and Dubai. He graduated from York University School of Business with an MBA.
Eugene Bukoveczky is a freelance writer for Investopedia.com. He holds a Chartered Financial Analyst (CFA) designation and has broad experience in investment research and portfolio management. He has traveled extensively during his career, working in Toronto, New York, London and Dubai. He graduated from York University School of Business with an MBA.
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