The autumn surge in tanker stocks has the look of a boom-and-bust cycle that can leave unaware investors holding the bag if they're not careful. But there's also a fundamental improvement in the market that's driving these energy stocks higher, which could be bullish for the industry long term. Balancing bullish fundamentals with trader speculation can be tough for investors, especially when the market is hot.
Amid the rapid rise in tanker stocks, here's why I think caution is still the best approach to this industry.
Tanker companies have reason to be excited
The chart below shows the rapid rise in the shares of Teekay Tankers (NYSE:TNK), Frontline (NYSE:FRO), Nordic American Tankers (NYSE:NAT), and Scorpio Tankers (NYSE:STNG) over the last three months, highlighted by a huge pop in early October.
Certainly, speculation played a role in such a large jump in stocks, but fundamental improvement shouldn't be overlooked. Charter rates for VLCC tankers have doubled to around $50,000 per day this year, and spot rates have been as high as $460,000 per day, according to Rivera Maritime Media.
Sanctions on Chinese firm COSCO has led to some of the short-term spike in rates as shippers related to the U.S. look for other tanker companies to work with, a bounce that could reverse if the Trump Administration changes strategies, but it's a help for now. Both fundamentals and politics are working in the tanker industry's favor right now.
Not so fast
The fundamental problem with betting on the oil tanker industry as long-term investors is that there's very little sustainable profitability. When rates rise, tanker companies build more ships or keep vessels operating longer into their useful lives rather than scrapping them.
As a result of this supply-and-demand dynamic, supply rose by 5.4% in the first nine months of the year, according to analyst Peter Sand with the shipping association BIMCO. Tanker owners are holding on to ships longer, and new builds are hitting the market. In time, that will push rates lower.
Oil is the key
One big tailwind for oil tankers overall is increasing global consumption of oil. Consumption isn't rising 5% per year to match this year's supply increase, but there is a steady increase in consumption of 1% to 2% per year.
As long as the global economy is growing slowly but surely, we should see oil consumption increase as well.
Where are oil tanker stocks headed?
There are certainly some bullish indicators for oil tanker stocks right now. Sharply higher rates versus a year ago, plus a bounce since the COSCO sanctions, should lead to rising earnings for at least the next few quarters.
What will keep me from buying into this rally is the fact that an imbalance in supply and demand won't last. Supply is already outstripping the increase in demand, and that will ultimately drive rates lower. Investors don't want to be stuck when rates fall. And with a big pop already behind us, I'll be sitting out an oil tanker market that looks like it's set up for a fall.