The energy sector has seen huge amounts of volatility recently. The coronavirus pandemic has brought vast swathes of the global economy to a standstill, and demand for oil and natural gas has plunged in response. Yet very few investors expect those conditions to last for very long, and as a result, there have been huge disparities in the oil market between what market participants are willing to pay for oil right now and what they'd be willing to pay six or 12 months down the road.
The difference between spot oil prices and what investors can get in the oil futures markets has created an opportunity for arbitrage for those able to store oil for a period of months. Some inventive oil traders have realized that oil tanker ships are a great place to keep their crude, and that's lifted many companies that specialize in transporting crude by sea. However, the obvious question shareholders should ask is this: Will those stocks fall just as fast when the energy markets return to normal?
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How tanker stocks have soared
The size of the jump in shares of tanker shipping stocks has been impressive. Shares of Nordic American Tankers (NAT 0.53%) saw the biggest gains, more than doubling briefly between April 3 and April 28. Gains for Scorpio Tankers (NYSE: STNG), Tsakos Energy Navigation (TNP 0.32%), and Teekay (TK 0.83%) weren't quite as large but still represented big upward moves for shareholders.
Nordic American in particular has been up front about the role that oil market disruptions are having on its near-term business prospects. CEO Herbjorn Hansson recently said that Nordic is charging almost $70,000 per day to allow oil speculators to use its vessels to store crude. That sounds like a lot, but with supertankers having a capacity of roughly 2 million barrels and recent opportunities to lock in spreads of $50 per barrel or more to store oil for just a few months, the math works out in speculators' favor.
What happens when spreads dry up?
The problem, though, is that the current conditions in the oil markets won't last forever. Even in just the past few days, hopes for reopening economies have dramatically narrowed the spreads between spot and futures prices. For instance, the current difference between June and October crude prices is just $10 per barrel. Paying $8 million to Nordic in hopes of capturing $20 million in arbitrage still makes economic sense, but that approach is not nearly as lucrative as it was when speculators were getting $100 million in upside potential.
We've already seen the impact those narrowing spreads can have on the tanker stocks. In just the past couple of days, the prices of those highfliers have fallen dramatically.
Stay prepared for volatility
As long as the coronavirus pandemic continues to keep major industrial businesses below full capacity, the supply-and-demand picture for energy will remain distorted from what investors are used to seeing. That will inevitably create price volatility that could help opportunistic speculators use tanker ships to earn profits, and tanker companies might see further gains that make them stand out among oil stocks.
Eventually, though, things will return to normal. That doesn't mean tanker stocks won't enjoy the one-time windfalls they get from making their vessels available right now. However, shareholders shouldn't expect the added profits to last forever -- and it's entirely possible that the stocks will return to their pre-April levels once all is said and done.
