Shipping orders for oil tankers show different outlook in short and long terms

Orders for crude tankers often reflect shipping companies’ expectations of future supply and demand. Managers often place new orders when they expect future demand to increase more than supply, on the condition that they expect to generate profit with the investment. When managers expect excess capacity to continue or grow, they refrain from placing more orders, sometimes even delaying them for a price. Since tankers generally take more than two years to construct (sometimes up to five years), the metric is often more relevant to long-term investment horizons.
Early sign of recovery
For the week ending June 21, the number of crude tankers on order rose to 6.71% of existing vessels from 6.67% the prior week, as published by IHS Global Limited on Friday.
The number of crude tankers on order began basing a year ago as shipping companies returned to the market to place new orders in anticipation of a supply shortage in the long term. Since managers are often slow to adjust to changes in demand and the short-run supply curve is inelastic (meaning its supply and demand aren’t affected by price changes), a small increase in demand can significantly move the price of the good, and we can expect shipping rates to rise from their current depressed levels within the next few years.
The crude tanker orderbook, which includes tankers under construction, also rose higher, increasing from 10.30% as a percentage of capacity measured in deadweight (DWT), a weight measure of the amount that a ship can safely carry across ocean, to 10.35% at the end of June 21. Investors look at the orderbook because it provides additional data that factors in when managers want the ships to be delivered in order to generate maximum profits from their ships. If managers deem supply and demand balance to be unfavorable within two years, they may ask to push the delivery further out into the future, which lowers construction activity in the nearer term.
Short-term and long-term outlooks differ
But most of the increase in tanker orderbook came from new orders and not necessary construction levels. Historically, the number of tankers under construction ranged between 60 and 100 ships. On June 21, the figure was 36, and it hasn’t yet shown signs of improvement. This means managers are in no rush to receive these new orders for service and risk remains in the short to medium term—even though new orders point to a long-term investment opportunity. Managers aren’t too eager to receive new ships because global oil trade growth is expected to remain weak over the next couple of years as the U.S increases its own domestic oil production and supply growth remains elevated.
As capacity grows more than demand, tanker rates will remain low, which is negative for tanker companies such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), and Teekay Tankers Ltd. (TNK) in the short to medium term. This will also negatively affect the Guggenheim Shipping ETF (SEA), which includes all four stocks in its holdings.
Source: Market Realist