Stock indexes are all down, but tanker stocks are up. What is that ? Conventional wisdom holds that “disruption,” however defined, is good for the stock price of publicly traded oil companies.
In the aftermath of President’s Day in the United States, the S&P 500 and the Nasdaq Composite fell 1.01% and 1.23% respectively from the close just before the long weekend. The Dow Jones Industrial Average fell 1.42%. This entire trio of indices (along with other broad equity composites) had already fallen in previous weeks as the sound of the saber from the Ukrainian region intensified. For example, the Nasdaq, which started 2022 just before the 16,000 level, had fallen to 13,381 at the close on February 22, a drop of around 15%.
Conversely, stocks of listed oil companies benefited. Consider International Seaways, traded on the NYSE, with the ticker “INSW,” a popular international tanker name battling a very weak market for deep-sea oil transportation. After starting the year at $15.24 /share and having fallen below $14/share at the end of January, it rose to almost $17/share at the close on February 22.
Another oil giant (if we can use that word in a fragmented company), Euronav – “EURN”, which started the year at around $9/share – had been pushed higher (by fighting stock market currents, for so to speak) at nearly $11/share. Savvy traders who might have bought shares of Frontline (“FRO”), another big oil stock, in late January at around $6.50/share would have seen them climb to nearly $8.50/share on New York after President’s Day.
For the buffs reading this – the threats of war (where we are at the time of writing) cause possible developments in the supply of available ships and demand for freight favorable to shipowners. To put it bluntly, when a fear of reduced oil availability (say due to a “shutdown” in a particular region) arises, frenzied oil buying sets in and tanker markets go crazy (how say otherwise?) as well as the oil markets. To be more academic about this, even as the hysteria subsides, ‘business model changes’ ensue – when superimposed on the tanker market, the changes lead to a certain period of reorganization of the cargo origins/destinations matrix. This means increased capacity utilization, in the form of more ships needed to move the same final number of barrels. The bottom line is that shipowners are able to obtain higher freights.
With London Energy Week there is no shortage of presentations and webinars. Tanker markets were specifically addressed in a Baltic Exchange webinar, with Fearnleys researcher Dag Kilen examining market dynamics. He said ‘It’s all about production’, meaning that shrinking oil supplies, from OPEC+ and others, have been responsible for tanker market malaise over the year. elapsed. This weakness, in turn, led to disappointing oil tanker stock prices.
Oil tanker markets are closely linked to the underlying commodity markets, notably crude oil.
An important observation about oil markets in Mr. Kilen’s remarks has significant relevance to the tanker market – where memories of the Q2 2020 boom (based on a buildup of oil storage) have not entirely faded. The Fearnleys analyst pointed out that not all tanker rallies correspond to an oil market “contango” (low prices nearby and strong ahead), which two years ago led to a tanker charter boom. He was quick to differentiate between different types of oil markets leading to oil tanker “spikes”.
At the start of 2020, and similarly after the oil price crash at the end of 2014 – we saw sharply rising oil price curves – which led to a run on charter tankers for oil storage . This could be in contrast to oil markets built on strong longer-term fundamentals which may also lead to an upward sloping price curve (suggesting positive economic expectations).
Currently, oil markets are “downgraded” (meaning prices are strong nearby and weaker in the future), a structure that is not always a shipowner’s friend if the curve is based solely on traders’ opinions on the economy. On the tanker side, there are may to be something else going on – with potentially hidden disturbances just around the breakwater.
The situation in Ukraine, and anything else could ignite, did not appear explicitly in the list of Baltic presentations, but what we could see now is a very different type of gathering in oil trades. Mr. Kilen, spoke of another oil market, the extremely strong environment of 2008 (at that time oil prices were nearing $150/barrel) – when “…we were worried we were running out of oil. ..and people were just starting to panic buy…and tanker prices at that time started to go completely ballistic.
Returning to the interaction with the oil market, he said: “There was no contango to drive it. It was just panic…it was about securing a barrel of oil…and securing a ship that was 100% guaranteed that it could deliver that oil.
We’re not there yet, but with all eyes on Ukraine, tanker charter counters may are due to release their 2008 playbooks. And buyers of listed oil stocks could profit from the mad rush.