It's been a rough few years for the oil-tanker industry. Falling U.S. oil imports ate away at tanker demand during the past decade, and new pipelines in Asia have reduced global demand, as well.
But the industry may finally be getting some good news, with U.S. oil production expected to decline in 2016 and demand for oil booming. That could lead to a resurgence in tanker demand, and boost the fortunes of Frontline (NYSE:FRO), Teekay Tankers (NYSE:TNK), and Nordic American Tankers (NYSE:NAT).
U.S. oil imports will rise in 2016
A big part of the decline in tanker stocks during the past decade has been a reduction in U.S. oil imports. No one predicted that shale drillers would expand production as fast as they did, and consumers cut back consumption at the same time. The result was a major decline in oil imports and demand for tankers. Earnings for the industry sank as a result. (Frontline is the proxy I used below.)
But the trend of lower U.S. imports is coming to an abrupt end. Imports have leveled out during the past year, and U.S. oil production is already 500,000 barrels per day off its June high. In 2016, it's expected to fall another 400,000 barrels per day. The result should be a rise in tanker demand as imports grow, and OPEC takes more share of the world's oil production.
Improvement has already begun
The tanker industry has already seen some improvement it can build on late in 2015 and into 2016. You can see below that Frontline, Teekay, and Nordic American Tankers have all seen the bottom line improve significantly during the past year as dayrates have risen.
As an example, Nordic American Tankers said that second-quarter 2015 dayrates were $38,800, up from $37,000 in Q1 and $12,100 a year earlier. One year doesn't mean these stocks will be huge winners, but at least rates are heading in the right direction.
Clouds on the horizon
What could derail the recovery is construction of newly built tankers. According to Frontline CEO Robert Macleod, the global fleet will rise about 17% in the next two years as new tankers are completed, which could put pressure on prices and utilization. In the past, there have been calls to scrap older rigs, but that was largely ignored. The market for tankers turned around, so massive scrapping was no longer needed.
While I see the near-term trends being strong, the addition of supply could be a negative for the industry if it isn't offset by some scrapping.
The tanker business isn't going anywhere
Low oil prices have hurt a lot of energy stocks, but ironically, it could lead to some strong trends for the tanker business. Frontline, Teekay Tankers, and Nordic American Tankers are the three to watch during the next year to see if rising U.S. oil imports can result in stronger profits. It's not a guarantee, but with positives hard to see in most energy-related stocks, this could be one with a positive story going into 2016.