The Crude Oil Contango Trade Is Driving Up Tanker Rates

Firms are rushing to secure supertankers in order to profit from growing contango spreads as crude oil prices continue to fall compared to futures prices (see Times Online article). Frontline estimates that about 80 million barrels of crude oil are currently being stored in tankers (see Bloomberg article), with 30-35 very large crude carrier storing 2 million barrels of crude each. Not surprisingly, a rush into the contango trade is causing tanker rates to increase about $75,000 a day. In some cases, shipping rates have fallen over 90 percent within the last year, with crude oil storage rates falling nearly 80 percent. Teekay (TK) is now trading about $19 a share after coming off its recent low of just below $11, Frontline (FRO) is trading near $31 a share, after coming off a low of $25 a share, and Overseas Shipping Group (OSG) is trading around $41 a share after a recently low of just over $28 a share in late November. Drybulk shippers have also seen rates rise recently, as much as 20 percent (see Yahoo!Finance article). DryShips (DRYS) fell to below $4 a share, after reaching $116.43 back in May. The company is currently trading over $15 per share. Diana Shipping (DSX) has come off its low of $6.85 to trade over $12 per share. Nonetheless, although there are some signs of improvement (see SeekingAlpha article), the contango spread and potential increased demand may not be enough to turn-around the industry, not just yet anyway. Exports from Asia have fallen off a cliff, and will no doubt continue to put pressure on cargo rates, leaving numerous companies at risk of failing. Until global demand begins to increase, or capacity begins to decrease, it may be a little longer before any rally can be trusted with confidence and expected to continue, the contango trade notwithstanding.