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Smoother Sailing Ahead for Oil Shipping Industry

The ripples emanating from the U.S. shale revolution are touching all sorts of industries worldwide.

The latest sector to feel the effect is the shipping industry… and, more specifically, the oil shipping industry. Because of the shale boom, the United States no longer needs to import as much oil from places such as Africa and Latin America.

Conversely, Asian countries such as China and India are eating up imported oil.

In fact, Indian imports of oil from Venezuela have tripled since 2011. And in January, Chinese imports of crude oil hit a record of 6.65 million barrels per day (bpd). The U.S. Energy Information Administration forecasts that, in 2014, China will be the world’s No. 1 importer of oil.

Longer Oil Trade Routes

The changing dynamics of global oil consumption are causing oil shipping routes to become much longer, with the average route up 9% since 2010.

Today, the average sailing distance for very large crude carriers (VLCCs), which can carry over two million barrels of oil, has lengthened to about 7,500 nautical miles. That’s a third of the distance around the globe!

And that means oil tankers will be tied up for longer every time they set sail, leaving fewer vessels to transport oil to Asia from locations in Africa, Latin America and the Middle East. This is great news for the long-suffering oil tanker sector, which has been plagued by overcapacity since the 2008 financial crisis.

Conditions really began to pick up in the fourth quarter of 2013 thanks to strong Chinese demand for VLCCs. Rates for these oil carriers rose from $10,000 a day in September to above $50,000 a day in December, the highest level seen since 2009. Since then, rates have since eased to $30,000 a day. But they remain nicely profitable for ship owners.

All told, these changes mean smoother seas for investors in oil tanker companies. The stocks of Frontline Ltd. (FRO), Teekay (TK) and Nordic American Tankers (NAT) rose by 106%, 20% and 27%, respectively, in the latter half of 2013. Industry insiders expect the improved conditions to continue through 2014.

The CEO of Frontline, Jens Martin Jensen, said in a January interview that increased demand from Asia and higher rates are improving the prospects of oil tanker firms this year.

The largest U.S.-based owner of crude tankers, Teekay, agrees. It said in November that rates for even the smaller oil tankers – Suezmaxes and Aframaxes – will increase in 2014. The company pointed to both increased demand and a smaller fleet of vessels holding true for 2014.

These stocks have traditionally been as volatile as being caught in a hurricane. But 2014 should promise investors in these companies a bit of blue skies and calm seas, making the stocks worth a second glance.

And “the chase” continues,

Tim Maverick

Tim Maverick

, Senior Correspondent

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