One industry is cashing in big on cheap oil

Low oil prices have meant an uptick in demand for tankers that ship crude oil and refined products around the world, writes Charles Kennedy. And that growing demand has meant tanker companies can charge more for their services.

Low oil prices in recent months have led to boom times for the tanker industry.

Oil and refined products (gasoline, diesel, jet fuel) are carried on special tankers called "very large crude carriers," or VLCCs. The more oil that gets moved around the world, the more demand there is for VLCCs, which allows tanker companies to get more business and to charge higher rates for their services.

Although there has been a bit of a lag effect, low prices for oil are translating into steadily higher demand for oil. A new industry report finds that the tanker industry is cashing in on the development. (Related: What Is Triggering Recent M&A Activity In The Energy Sector?)

The entire VLCC market is “firing on all cylinders,” and won’t slow down anytime soon. That is the conclusion from a new report from Poten & Partners. Several industry players have posted “stellar earnings for the first quarter.”

Not only have low oil prices contributed to good conditions for tanker owners, but the supply of VLCCs has finally worked in the tanker industry’s favor.

Just as with oil, the tanker industry experiences booms and busts. About a decade ago there was a big build out in tanker capacity, which led to an oversupply of ships. As demand has caught up, supply has remained relatively stable, pushing up tanker rates. (Related: Oil, The Fed And The Ugly Truth About Capital Markets)

“While deliveries will pick up in 2016, the overall orderbook remains reasonable and expectations are for only modest fleet growth through 2017,” the Poten report found.

Tanker rates are now at their highest levels since 2008, and tanker companies are bouncing back in a big way after several years in the doldrums. (Related: Why The US Should Worry About Oil Sector Jobs)

 

On top of the fact that oil demand is high and tanker supply is tighter than in recent years is the added benefit that VLCCs themselves spend less on fuel when oil prices are low. With cheaper bunker fuel, each ship can improve its margin.

One final reason that the VLCC market is experiencing a boom is the market “contango.” Futures prices are more expensive than the current price, owing to a short-term glut. That has some traders storing oil on tankers waiting for a pricier day in the future – which, in turn, has benefited the owners of VLCCs who charge for the service.

The confluence of events has come together to produce a very positive environment for the VLCC industry.

By Charles Kennedy of Oilprice.com

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