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Why Oil Tanker Stocks Are the Hottest Spot in Energy Today

By Travis Hoium - Updated Oct 7, 2019 at 1:39PM

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Will this industry's hot streak last?

At the end of last week, investors began bidding up oil tanker stocks, highlighted by a big jump in Teekay Tankers (TNK -1.41%), Nordic American Tankers (NAT 2.15%), Frontline (FRO -1.72%), and Scorpio Tankers (NYSE: STNG) on Friday. But the move seems a little odd, given that oil prices have been in decline over that time. 

Despite oil price movements, there is reason for traders to be bullish on tanker stocks right now. But those bullish indicators could take a turn for the worse very quickly. 

TNK Price Chart

TNK Price data by YCharts

Why tanker stocks are climbing

Despite the lack of fireworks in commodity markets, the price for tankers has been going through the roof. In an industry report from Nordic American Tankers with data from Clarksons Platou, dayrates for very large crude carriers are up 55% in the past week, and current rates are 425% higher than last year's. Suezmax is up 114% and 359% over the same respective time periods. 

Geopolitical risk in the energy industry is pushing dayrates higher across the industry. Not only is the attack on Saudi Arabia's oil supply leading to fears that more oil will need to be shipped around the world over the next few months, but the Trump administration is also putting sanctions on foreign suppliers to the industry. China's Cosco, one of the world's largest vessel owners, was hit with sanctions recently, and if companies with U.S. ties can't use Cosco, it will put quick pressure on rates in the spot market. 

Oil tanker on open water.

Image source: Getty Images.

What investors should think

If spot prices for tankers stay high for an extended time, it will lead to higher revenue and profit for tankers, but the immediate impact will be muted. Most tanker operators lease out vessels on longer-term deals at terms lower than the spot prices would indicate. 

If high rates last in the tanker market, they will eventually flow through to tanker owners' bottom line. But there's one big reason to stay away from all of the tanker stocks right now. 

Tanker stocks aren't worth buying today

A 10-year view shows that tanker stocks aren't good at generating long-term value for shareholders. 

TNK Chart

TNK data by YCharts

There are a number of reasons for this underperformance, but the biggest is that companies have very little durable advantage. Any competitor can add capacity to meet the market's need, and there's even the risk of being replaced by pipelines being built around the world. 

One of the reasons rates were so low in 2018 -- which had Teekay, Nordic American, Frontline, and Scorpio Tankers all reporting losses -- was an oversupply in the tanker market. If high rates continue, they'll begin expanding again, and that'll push rates lower. Windfalls are short lived in the tanker industry, and I don't see any reason that won't be the case this time around. 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Frontline Ltd. Stock Quote
Frontline Ltd.
FRO
$12.01 (-1.72%) $0.21
Nordic American Tankers Limited Stock Quote
Nordic American Tankers Limited
NAT
$2.85 (2.15%) $0.06
Teekay Tankers Ltd. Stock Quote
Teekay Tankers Ltd.
TNK
$25.23 (-1.41%) $0.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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