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US tanker stocks are set to surge – here’s why

Michael explores a trading idea to take advantage of the glut in oil
April 30, 2020

Last week I looked at Royal Dutch Shell (RDSB) and our cover feature by Neil Wilson explored what the price of oil means for investors. Neil touched briefly on a theme I've been eyeing up for a trade during the oil market chaos – that of Very Large Crude Carriers (VLCCs).

Currently, almost 30 oil tankers are anchored as storage off the coast of southern California – tankers that would have originally gone out to the source of the supply chain and shipped it around the world. Stranded might be a better word, as they are full up with oil, but unable to deliver it. Refineries are flat out. Space is running out to fill the glut in oil, and this has led to the price of storage space doubling in just two months. Land storage is full, and tankers are filling up.

Last week, we saw what happened in WTI futures as the May contracts went negative. When storage runs out nobody wants to hold a physical product they can't store, and so it should come as no surprise that tanker stocks are swiftly moving through the gears.

That's not to say they are a sure thing, though. Volatility works both ways, and all it takes is one tweet from President Trump to catch a trader offside in a position. Any hint of a deal – or even a complete whopper of a lie about a deal – will see prices move in reaction.

But what we do know is that many tanker companies are set to earn at least several years' worth of profit in just a few months. Some, like Scorpio Tankers (US:STNG), could earn their entire market cap in profit over the year. I don't consider it unreasonable for June WTI futures to go negative, either, because unless storage increases – which seems unlikely – would-be buyers will still be unable to take delivery.

A general tanker's costs are fixed per day. This means that when storage rates increase these revenues drop down to the bottom line. In a stock market where global equities are seeing large drawdowns or are struggling for survival and slashing dividends, this is a sector that is showing significant upside across the board due to favourable macroeconomic conditions.

This sector is also helped by the contango market, where prices in the short term are lower than prices in the future. Traders are then motivated to store the oil in the hope of cashing in at a higher price in the future. VLCC charter rates were around $40,000 per day at the start of March, but by April average daily rates had risen to hover around $150,000 – an eye-watering increase, but even bigger compared with the $10,000 a day rate of a year ago.

US tanker stocks have proved volatile, though, as can be seen in Chart 1. Scorpio Tankers broke out of a range last April and doubled in nine months, only to give back nearly 70 per cent of its gains in Q1 2020. Looking towards the end of the chart, we can see that volumes have surged dramatically, as interest in the stock builds and accumulation pushes the prices up. Last month, the president of the company splashed out $1,963,291 on call options. Remember, nobody ever forces a director to buy. However, it is also worth knowing that he likes a trade on the company. He also bought options last year, and when he sold the price halved.

I am looking to go long of Scorpio Tankers if it can break the $40 resistance. Given the price is some way off this already I'm also looking out for a bullish cup-and-handle pattern – as shown in last week's column on Shell. This pattern is great because it shows strength on a dip, and the price moves past the previous resistance in the handle form.

Another tanker stock that has sold off savagely is Tsakos Energy Navigation (US:TNP). We can see that the price has just broken through a scruffy cup-and-handle in Chart 2, and again volumes in the stock since early March have surged. Volatility has also increased, with many gaps up and down, and so this stock - as well as due to its high leverage – must come with a wealth warning. Only trade this stock with money you can afford to lose, and revise your position size downwards to factor in increased volatility. I intend to take a long position when the price breaks the $4.65 level.

The beauty of the oil tanker market is that when more tankers are taken out of active use in order to store oil, then the number of available tankers goes down and supply tightens. In such a drastic situation, oil tankers will soon be able to name their prices. While production is higher than demand, storage is always going to be required. And it'll take time to work off that stored oil should that happen.

There is the old question of the efficient market here, too. If everyone knows about the storage issue, surely the producers will cut in order to balance the equilibrium? Well, maybe - but the storage issue has been known about for a while, yet Saudi Arabia and Russia still decided to throw their toys out of the pram, surely mindful of the consequences. Humans aren't always rational, and neither is the world likely to immediately return to business as usual when the lockdown is over. There are reports of refineries in India asking for lower crude imports due to being at max capacity.

However, I do believe there will be production cuts at some point. There is no doubt that this party in oil tankers will come to an end. Everything does, as those of you who were around during the dotcom bubble will remember. But just because we know the music will stop, does not mean that we should stop the party. Enjoy it while it lasts.

 

You can contact Michael and get your free copy of Ten Habits of Highly Profitable Traders from www.shiftingshares.com

Twitter: @shiftingshares

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