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Trade Deal Could Send Oil To $75

One of the decisive factors…

Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Tanker Companies Profiting From Low Oil Prices

Among investors, various industries seem to go through the equivalent of “fads” as the market overall warms to growth potential in a certain industry niche and then later cools on stock prospects. This has happened with many industries large and small over time, but one of the more interesting cycles is playing out again right now in oil tanker stocks.

Even though there are many investors who maintain a special interest in and focus on energy stocks, there are actually relatively few investors in oil tanker stocks. Oil tanker companies traditionally get a lot less attention from investors and financial analysts than the traditional production and pipeline aspects of the energy market. Related: This State Just Became The World's Greatest Renewables Market

That’s unfortunate because the tanker markets provide valuable diversification for energy investors and can actually move up when much of the rest of the energy market is moving down. The current market environment proves this point. Even as numerous oil companies have been hammered all year and investors are grateful the short respite of the last couple of weeks, tanker stocks like Teekay have been hitting new highs for much of the year.

There is a reason for this. Like pipeline companies, tanker stocks do not profit on the price of oil so much as the need for transportation of that oil. Whether oil costs $10 a barrel or $100 a barrel makes no difference to the cost of shipping crude and thus to the profits of tanker companies. In fact, on top of making money on volume, tanker companies see lower costs for fuel when oil prices are low. Related: Macroeconomic Instability For Emerging Markets Thanks To Commodity Bust

Moreover, much like offshore drilling servicers (another fallen industry angel), the tanker market is driven by the supply of available ships and the demand for transport and storage of oil. That second factor – storage – is what is driving oil tanker stocks higher right now, and it’s one of the reasons why tanker stocks from NAT to FRO make interesting options for energy investors looking for a diversified portfolio.

As oil prices fall, what often happens is that oil futures curves start to change shape such that prices for oil delivered now fall below the price for oil delivered, say, 12 months in the future. This creates an incentive and a profit opportunity for traders. By buying cheap oil today and agreeing to deliver it 12 months from now, traders can lock in a profit, but they need a place to store that oil for the next year. Tankers provide such storage. It’s not the typical use for a tanker of course, but in special situations like depressed oil markets, it creates extra value for tankers and can make day rates on very Large Crude Carriers (VLCCs) and other tankers rise dramatically. Related: Energy Storage Just Got A Massive Vote Of Confidence

Under normal conditions, tanker companies make a small profit as long as the market is not oversupplied with tanker capacity. A few years ago, just like the deep water drilling market today, tanker companies were making so much money that too many new vessels were built and an oversupply resulted.

Today much of that imbalance has finally worked itself out and tanker rates look more reasonable. Add to that the need for oil storage as a result of the collapse in prices and the movement of the oil futures curve, and it creates a recipe for stable and even accelerating profitability in the tanker markets. It’s unclear how long the current downturn will last of course, but the longer oil prices stay low, the more money tanker companies will make from storing crude. Given that dynamic, investors may wish to consider adding a tanker stock or two to their portfolios in order to benefit if crude prices remain subdued longer than many expect.

By Michael McDonald of Oilprice.com

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