Other Ways to Play the Downturn: Shipping Stocks, Again
Shipping stocks are soaring again... ahem... TANKER shipping stocks are soaring again.
I've posted about that trade here, and used to keep up with a list having that focus here but there's a more active group chatting about it here.
DHT up 5% on Friday... still near the lows... Chart following the text
Why now ? With a market implosion that is paired with cratering oil prices, there are three consequences:
1. Bonds crashing means... interest rates are falling... so the carrying costs of ownership should be falling for those solvent companies who are able to refinance in this environment. Tankers got a nice bump just a few months ago, so should be doing OK... and the tankers should be able to lower costs by refinancing at historically low rates.
2. Oil prices cratering... is being done on purpose... Russia and Saudi Arabia operating a price war against the United States... is intended to put higher cost producers out of business. A part of that is likely to include making efforts in cutting off access to hulls needed to move product. But, with economies imploding, too, RIGHT NOW, it isn't at all clear that the lowering of prices will increase demand very much. If demand craters and the producers keep producing... you still need somewhere to put all that oil. The number of tankers is large enough and they hold enough that they will easily find utility as oil storage... which won't bring peak rates... but will make money... and drive rates higher. In recent past downturns we have seen hedge funds buy boats and fill them with oil... float them around... just to be in position to sell the oil again at higher prices when prices rise again.
3. The U.S. shale oil boom is among the high cost operations, their sustained operation fueled by lower quality high yield debt issues. That market for debt is going to be exploding soon... possibly making it challenging to sustain their operations. When they don't make money from pumping oil at prices that ARE less than their costs of production... it will become cheaper again to ship oil from the middle east than to pump it out of U.S. domestic wells. So, suddenly, you'd need a WHOLE lot more tankers... since that trade died with the U.S. oil boom.
Not a trade without HUGE risks. The Saudi's and Russians pairing up to declare war on American oil independence... might not go over that well. Trump has proven more than willing to disrupt others plans for manipulating prices and free trade... by manipulating them right back. Probably won't happen quickly, but, if the effort persists longer term... in the time the debt issues will take to manifest as impediments to production... you might see tariffs imposed on foreign oil... which would kill the shippers right along with the Saudi/Russian plans to put America out of the oil business.
DHT up 5% on Friday
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