What happened
Tanker stocks rose sharply this week as oil prices rose and investors saw the need to move more oil around the world. Not only is solid economic data in the U.S. pushing energy markets higher, but China's rising demand could also help.
According to data provided by S&P Global Market Intelligence, shares of Scorpio Tankers (STNG 1.75%) jumped 14.6% between the close of trading last week and 1:00 p.m. ET on Friday, Frontline (FRO 1.03%) was up 9.7% in that time, and Teekay Tankers (TNK 1.90%) popped 10.9%. This is in stark contrast to a lot of growth and technology stocks dropping this week.
NYSE: STNG
Key Data Points
So what
The potential for higher interest rates has been a big focus by investors this week, but the reason is the hot economy. The jobs report showed both a gain of 517,000 jobs last month and a drop in unemployment to 3.4%. That means the underlying economy is strong, and that's why oil prices were up this week.
There's also a steady climb in oil inventory in both the U.S. and Europe, which may indicate that oil needs to find a place to go. One logical location is China, which ended its zero-COVID policy recently and could see an economic boom later this year.
NYSE: FRO
Key Data Points
Investors have been speculating that a sluggish Chinese economy could benefit from reduced COVID restrictions, but the government did that almost overnight. We don't yet know what a bounceback will look like in the Chinese economy, but even a small increase in oil demand can cause prices to spike for both oil itself and tanker demand.
After a slump in earnings during the pandemic, tanker companies will take any good news right now.
STNG Net Income (TTM) data by YCharts. TTM = trailing 12 months.
Now what
Rising oil demand and higher prices will only be good for tanker companies for the time being. But remember that this is a boom-and-bust business, with companies building ships during the good times only to be left with oversupply when demand drops. And long term, the industry's fortunes don't seem to be getting better as electric vehicles compose a larger percentage of vehicle sales.
I do think the short-term outlook for these companies continues to get better. But that doesn't mean these companies are a great buy. Zoom out from the day-to-day trading and look at how much these stocks are down since 2010. They have all been money losers for investors because the ship business often involves self-dealing and the booms and busts I highlighted above.
A short-term pop in the stock or even earnings will not make this an investable industry. Investors would be wise to take profits off the table at a time like this and look for a more sustainable industry to invest in.
