Oil Transport Industry and Market Dynamics

In the last 18 months, the overproduction of crude oil has led to falling oil prices. Nations and corporations have used these historic low prices as an opportunity to stockpile oil. One industry that may benefit from this trend is the crude tanker business. Crude tankers are transport ships that move bulk volumes of crude oil from the oil extraction facility to the refinery.

This article explores the crude tanker business, how it works, its dependency on oil prices and supply and a few stocks of companies in this business.

How Does the Crude Tanker Business Work?

A crude tanker is an oil tanker built specifically for transporting crude oil (as opposed to refined oil). The firm that owns the crude tanker leases the ship under a complicated contract to oil marketers, oil refiners, chemical companies, or other users like contractors representing governments, consortiums or businesses. Contract terms vary based on the length of the lease, the quantity of oil to be transported and the route of transport. The contract also includes details of who will bear operational expenses like fuel costs, crew payments and insurance.

Long-term contracts that span several months, or even years, are quite common. Depending upon the size, capacity, and operational expenses, it is common for very-large crude carriers (VLCC) and ultra-large crude carriers (ULCC) to generate daily profits of $100,000 or more for their owners. 

Key Drivers and Challenges in the Crude Tanker Industry

An oversupply in crude oil production leads to a decline in oil prices. Energy-consuming nations may use the opportunity to stockpile millions of barrels of oil at the lower prices. This results in high demand and mass movement of crude oil from points of crude oil extraction to the refineries, which is good for the crude tanker business.

Along with oil supply, geopolitical developments also play an important role in the crude tanker business. For example, as Iran emerges from international sanctions, it is expected to boost its oil production and exports to match its pre-sanction levels. Asian economies like China, India, Japan and South Korea are currently importing a significant portion of crude oil from the Atlantic Basin. Once Iranian oil is available, Asian economies will likely ship from the geographically closer Iran. Crude oil tankers will see greater transportation volume once Iran begins exporting more oil (and higher revenues). But the decline in travel distance will nullify many of these gains. 

Oversupply of crude oil also results in a decline in fuel cost to operate the ships. This fuel cost, commonly known as bunker price or ship fuel price, is highly correlated with crude oil prices. Amid declining oil prices, CNBC reports that “The average daily fuel cost to operate a VLCC has fallen from over $75,000 to under $18,000.”

Though this decline in oil prices helps crude tanker companies lower operation costs, the benefits are often negated in contract negotiations with customers. When operating costs are low, customers may opt to assume all operating costs, which takes away an opportunity for marking up services.

Additionally, competition among different fueling centers located across the globe also impacts ship fuel prices and, hence, the crude tanker revenues. For instance, because of increasing competition from Rotterdam, the Russian port of St. Petersburg was forced to drop its fuel prices recently. Crude tankers benefit from such declines, but the majority of these benefits are passed on to end customers.

The impact of refined products also plays an indirect role in the crude tanker business. The refining process takes crude oil as input and produces refined oil ready for consumption. Depending on the type of crude oil refined, the process also creates sellable byproducts like naphtha, olefins, asphalt, lubricants and kerosene. Different types of crude oil will often be routed to refineries in countries where there is also a demand for the byproduct or end product. For instance, kerosene is used extensively in India as a fuel. Crude oil from the Middle East is especially suited for creating kerosene. An increase in the demand for kerosene in India will result in more demand for the transportation of Middle Eastern crude oil to Indian refineries.

Other expenses and risks in the crude tanker business include risky routes where pirates may seize the tanker and demand ransom, and damage from accidents or bad weather. Insurance against such incidents is a significant operational cost for crude tankers.

Top Publicly Traded Crude Tanker Companies

Some well-known, publicly listed crude tanker companies include Frontline Ltd (FRO), Teekay Tankers Ltd (TNK), Tsakos Energy Navigation (TNP), Nordic American Tankers (NAT), DHT Holdings (DHT), and Euronav NV (EURN). (For more, see “Looking to Invest in Oil Tankers? Try These 3 Stocks.”)

Let’s take a quick look at the performance of several tanker companies in the last year. In the graph below, you can see that returns range from 5.5% to 61%.

The long-term performance of these same companies have been less than stellar. Over a 10-year period, almost all the companies have returned losses to the tune of 50 percent to 95 percent.

The Bottom Line

The valuation of crude tanker companies and the overall industry is complex. The overall crude tanker market is highly dynamic, and the driving factors change drastically due to local and global developments. The long-term performance of crude tanker companies may show disappointing returns. However, considering the sporadic and multiple crests and troughs, there are ample opportunities available for short-term trading. Common investors playing on these stocks should closely track regional, global and geopolitical developments in oil as these will impact the short-term valuations of crude tanker companies.