Itâ€™s now more than a year since the tanker market took off. In mid-2014 tanker earnings picked up and since then have been in the $30-$40,000/day range.
But the market remains nervous. This tanker pick-up coincided with a slump in dry bulk earnings, which is interesting because on paper bulkers and tankers both seem to have surplus capacity. So why are tankers doing so much better than bulkers?
On an â€œall sizes averageâ€ basis tanker earnings generally exceed bulker earnings (the tanker â€œbasketâ€ contains a greater share of larger ships). For example, between 1990 and 2015 to date tanker earnings averaged $24,996/day, whilst bulkers earned $13,933/day. That gives tankers a 79% premium over bulkers. During the seven years since the Credit Crisis, the premium has remained. Tankers have earned $18,281/day, compared to bulkersâ€™ $12,427/day, a 47% premium. So the â€œpremiumâ€ relationship held, even during a period of deep recession.
However, during the period of recession tanker earnings have swung from below to above â€œaverage premium levelsâ€. To illustrate this point we have estimated what tanker earnings â€œshould have beenâ€ over the last seven years if they had followed the â€œaverage premiumâ€ relationship with bulker earnings over the full period back to 1990. This relationship was estimated using a regression equation as a â€œrule of thumbâ€, using monthly data for the period 1990 to 2015, and then used to estimate tanker earnings since 2009 from bulker earnings, shown by the red line on the graph.
For the first five years tankers underperformed compared to the long-term â€œaverage premiumâ€ versus bulkers, with the blue line, showing actual earnings, below the red line. But in 2014 they started to exceed the expected premium as bulker earnings dropped and tanker earnings increased. Currently tanker earnings offer a significant â€œbonusâ€ above the estimated â€œnormâ€, at levels about six times higher than bulker earnings.
More Than One Answer
So whatâ€™s going on? The first answer is that tankers are playing â€œcatch upâ€ for the bad run early in the recession. But there are other answers to the question. One is that in 2015 oil trade has grown much faster than expected, increasing by 4% compared with only 2% expected earlier in the year. Another is the oil price collapse from over $100/bbl to close to $40/bbl, creating an opportunity for arbitrage by holding oil in ships, in anticipation of a price increase. Additionally, of course, bulkers have suffered from an absence of demand growth this year.
The Usual Suspects?
So there you have it. The tanker boom has gone on longer than many might have anticipated and tanker earnings are outperforming their long-run relationship with bulker earnings. But a â€œfundamentalâ€ surplus remains and investors might be right to be cautious. Scrapping has almost stopped, ordering has picked up and supply growth is set to increase. So, enjoy it while you can, and remember that itâ€™s partly a game of catch up. Have a nice day.