The Baltic Dry Index Chart Says This Left-for-Dead Industry is Worth a Fresh Look

Posted by jbrumley on December 1, 2017 11:07 AM
120117-baltic-dry-index-weekly

Ten years ago, when oil prices were going nuts (in a bullish way), the business of ship-building and transporting crude was even more nuts. The daily cost of renting a tanker soared more than 400% over the span of two years, which of course drew a whole slew of new ships -- and even new companies -- into the fray.

The obvious outcome materialized shortly thereafter. Not only did rising oil prices lead to a cyclical swell of production that ultimately pulled the rug out from underneath the market, the implosion of oil prices also led to an even nastier implosion of the oil vessel and shipping market. An overabundance of these ships in the midst of a so-so market for crude oil meant the cost of charting these kinds of boats fell a whopping 94% in less than a year.

Those charter prices have never really recovered, though the action seen over the course of the last several months implied that the seaborne oil shipping business (which some had left for dead long ago) is coming back to trade-worthy life.

The barometer for seaborne shipping is the Baltic Dry Index... an aggregate of prices offered by shipping companies each and every day. If they're asking more, it's because they're seeing more demand and can afford to raise their prices. If they're asking less, it's because demand is weak, or the supply available vessels is great, or both.  

With that as the backdrop, the chart of the Baltic Dry Index below speaks volumes. It was beaten to a pulp in 2014 and 2015, with oil prices, but has since recovered a little, also with oil prices. Though hardly "robust," this is a sign that at least most of these shipping outfits are keeping the bulk of their fleets deployed and profitable rates.

120117-baltic-dry-index-weekly

Astute investors will have noticed that while we see some semblance of strength from the Baltic Dry Index in 2013 in step with improving oil prices, that rise in no way compares to the surge in oil transportation prices in 2007/2008, when crude oil was also wildly expensive.

There are two key differences between 2012 and 2007. In 2007, oil shot to nearly $150 per barrel, while in 2012 is stalled at around $110. Second, and far more important, in 2007 there simply weren't enough of these tanker vessels to meet the demand then. A bunch of boats -- too many new boats -- were built in 2007 and 2008 (about two years too late), and while some have been decommissioned since then, the supply of available tanker boats is still tremendous. This has kept shipping rates mostly suppressed since then.

Nothing cures an imbalance like time, though,  and given the slow and steady upward push from the Baltic Dry Index, one can't help but wonder if the recent technical progress from the Baltic Dry Index is a subtle sign that the supply/demand matter here is moving into a bullish condition for these stocks. The gently-rising range -- framed in blue -- was broken a few weeks ago, and the index has remained above the upper edge of the trading range ever since.

It's all, of course, a function of oil prices, which have remained surprisingly firm since rekindling a major recovery effort in June.

120117-crude-oil

Though there's still vulnerability here, every day crude prices don't slump increases the likelihood that crude oil will remain at prices profitable for producers, which in turn means demand for crude oil shipping companies will also keep them in the black. They've not been overwhelmingly profitable in a long, long while, but there's hope on the horizon now.

As for what this means to traders, you can put shipping stocks back on your watchlist.

That's not to say all of them will soon be thriving. Many of them are still in serious trouble, and should be avoided. This is a budding trend most investors don't see developing though, which is a newcomer's edge... there's not yet any real competition for these picks.

Just keep an eye on the Baltic Dry Index though. Much like the ocean these companies use to ferry crude oil from one point to another, this is a potential trend you can't afford to turn your back on.

 

BECOME A BIG TRENDS INSIDER! IT’S FREE!