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Why Frontline Stock Dropped 9% Today

By Rich Smith - Feb 24, 2020 at 1:08PM

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This oil stock just got sick from coronavirus.

What happened

Oil prices moved sharply lower -- down 4.5% -- as trading got back in gear Monday morning. And sliding alongside the commodity were shares of oil shipper Frontline Ltd. (FRO 6.82%) -- down an even steeper 8.8% as of 12:10 p.m. EST.  

This slide is tied to today's coronavirus news, which is taking stocks down left and right. But how?

A red oil tanker foredeck against a blue ocean

Image source: Getty Images.

So what

Coronavirus, once exclusive to China, has gone global, with 79,000 persons infected so far, and new outbreaks reported over the weekend in South Korea, Italy, and Iran. The wider the coronavirus spreads, and the more countries that experience infections (so the thinking goes), the less trading these countries will do with one another.  

The result is less buying and selling (and shipping) of oil between nations -- less use of oil, period, to power transportation means around the globe. Thus, accordingly, there's less demand for Frontline's services.

Now what

Oil shipping rates went on a tear last year, by the way, precisely because there was growing demand for oil and oil shipping services. The rates demanded to charter very large tankers roughly doubled, and as my fellow Fool Travis Hoium pointed out in December, in some cases, spot rates (the cost to hire a ship instantly, to meet a spike in demand) on tankers shot up as high as $460,000 per day -- nine times the average rate.

Even if the coronavirus doesn't completely tank demand for oil -- even if it just slightly shaves off some marginal demand, it could have a sizable impact on Frontline's profits. And according to data provided by S&P Global Market Intelligence, Frontline had only become profitable last year, after two years of losses.

Coronavirus just might be the catalyst to tip Frontline back into losses again this year.

Rich Smith 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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$12.22 (6.82%) $0.78

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