What's on the Horizon for Shipping?

After taking a severe beating last week -- in fact, the worst five-day session so far this year, the Dow Jones Industrials stormed back today, finishing up 1.09%. The other two major indices even outperformed the Dow, with the S&P 500 finishing up 1.60% and the Nasdaq pulverizing the market with a 2.46% performance. Also turning in a strong rally today was the United States mid-continent oil benchmark, WTI oil futures, up 1.49%.

Ships away
The shipping industry saw a bump today as well. Consisting of a group of companies carrying large debt loads and leveraged balance sheets, the oil tanker and dry bulks sub-industry has been hit particularly hard since early part of 2010, when shipping rates starting dropping precipitously. Shipping is strongly influenced by both the supply and demand of oil and dry goods and the supply and demand of oil and dry goods ships. As we all remember, during the large crude spike in 2007 and 2008, when crude skyrocketed to $140 a barrel, demand for both oil and oil tankers shot u[p as well. With energy prices so high and profits soaring, shipping players wanted more of the action. A large number of ships were ordered, but that in turn caused a supply shock that can still be seen, with tankers entering service in 2012 and 2013 representing 21% of the world's total fleet.

As the shipping price chart for Suezmax tankers show, as more and more ships came online between 2010 and the present, the dayrates correspondingly decreased.

Monday's performance

Company

Today's Price Change

52-Week Price Change

Debt/ Equity

DryShips (Nasdaq: DRYS  ) 5.14% (43.98%) 112.8%
Diana Shipping (NYSE: DSX  ) 8.33% (36.84%) 32%
Frontline (NYSE: FRO  ) 13.86% (73.85%) 715.2%
Overseas Shipholdings Group (NYSE: OSG  ) 11.45% (64.61%) 146.4%
Ship Finance International (NYSE: SFL  ) 6.59% (37.72%) 232.22%

Source: Yahoo! Finance.

Why today?
Usually, large price changes follow mergers and acquisitions, earnings reports, or other significant changes in a company's outlook. The shipping industry received good news on a few different fronts today. China confirmed its desire to focus on growth, which reaffirms its plans to keep building its infrastructure as well as increase its appetite for oil. Also, during the G-8 conference talks, world leaders reiterated their desire to keep Greece part of the European Union. A nasty split between Greece and the eurozone could cut out more than 1 million barrels a day in demand.

Another reason shipping rates could peak higher is the Iranian oil sanctions imposed by the United States. As more Asian countries adhere to the sanctions, they have to find additional oil sources, primarily in East Africa, which causes the shipping industry to transport oil further, increasing not only the dayrates but also amount of time for a delivery.

Foolish takeaway
The price increases today can be chalked up to investors buying in on an industry that's been shunned. However, I wouldn't look at today's increase as start of a bull market. Sure, growth in China and eurozone stability will increase the demand for oil, but these companies are facing an oversupply of ships for the medium term and the debt loads are frightening, especially when the dayrates are at breakeven levels.

For a great investment, I would consider the company in this free report. It's an energy firm that can withstand shocks in oil prices, and most other oil and gas companies are heavily dependent on it. See what this company is and why it's considered the only energy stock you'll ever need.

Joel South owns shares of no company listed above. The Motley Fool has a disclosure policy.
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