It seems the Bermuda Triangle is on the move – large ships are disappearing all over the world!
At least that is what it seems like lately… with massive oil tankers “going dark” and hiding out in international waters.
In fact, the world’s largest oil tanker – the TI Europe, capable of holding 3.2 million barrels of crude oil – is believed to be floating offshore of Singapore brimming with oil.
So why is all this black gold just sitting and not being sold?
Well the unusual oil market conditions of the last few months have revamped the use of a technique not seen since 2010.
Companies are storing vast amounts of oil on tankers because they are waiting for the perfect time to sell – when prices are at their highest.
Riding the Contango Wave
At the height of this practice in 2009, there was nearly 100 million barrels of oil floating in oil tankers around the world.
The reason that this trade has come back to life can be summed up in one word: contango – when prices rise for a particular commodity monthly.
The combination of the U.S. shale oil boom and Saudi Arabia’s pricing tactics are pushing oil prices down. So the smart companies are poising their crude in oil tankers and waiting to jump on the higher oil prices in the months to come.
Right now, approximately 50 million barrels of crude oil are being stored in oil tankers offshore of South Africa and Asia.
The direct beneficiaries of this practice are the oil tanker companies.
Wall Street seems to be hating anything energy related at the moment and seems to believe we’ll see an exact replay of what happened in 2008-2010, when oil demand dropped sharply. Thus the stocks of many oil tanker companies have tanked.
I don’t quiet agree with Wall Street since demand is still climbing (though barely). For now, oil remains more expensive in the later futures months – meaning the oil tanker trade will grow, benefitting tanker firms.
That means this is perfect opportunity for value investors to pounce.
All Aboard the Tanker
Rising demand and stagnant oil tanker capacity is a recipe for higher tanker rates and profits for the companies involved in the industry.
According to The Wall Street Journal, day rates for oil tankers are on the rise, with rates soaring 27% in the past month alone!
On average, tanker rates in the third quarter of 2014 were the highest for any third quarter since 2008.
NAT owns a fleet of 22 Suezmax vessels, and right now it’s selling for only 75% of the book value and offers a yield of about 7%. That means investors can collect the dividend while Wall Street is still waking up to the higher profits coming in the door.
TNP operates 33 vessels in the oil trade. This stock is trading for about 50% of the book value and has a decent yield of about 3%. The management at TNP summed up the current conditions for the sector nicely, calling the drop in the oil price a “double blessing” for the company.
Not only has it made the cost of doing business (fuel for the tankers) cheaper, but the cheapness of oil has increased the need to store oil in tankers, the contango trade. In fact, TNP management says that spot rates have doubled over the past year for the ships it owns.
Those kinds of favorable tailwinds are just what the oil shipping industry needs.
And “the chase” continues,