- Dugald Malcolm, Montreal, Canada

Over the past few months, Eric has been talking about the oil and gas services and equipment sector. He sees the sector as a very attractive investment opportunity for the next several years. Daily rig rates are commanding high premiums and oil services companies are raking in the money, especially with the high price of oil. The higher the price tag on a barrel of oil, the more money can be attributed by the oil companies to seeking out and finding new sources of this rare resource.

While the explorer, drillers, production and processing companies might have it good, there is a completely different story happening for another subset of companies involved in the supply chain. Once the crude oil is taken out to the ground, it must be transported to a refiner where it can be processed. The job of this transport lies mainly with the oil tankers, and the shipping industry has been up against severe head winds as of late. While oil rig have been achieving high rates for taking the oil out of the ground, the opposite has been the case for the floating behemoths in charge of transporting the crude.

The size of a tanker is typically measured in DWT, deadweight tonnage. DWT is the amount of weight a ship can safely hold. It ranges from the small General Purpose tanker, with a 10,000 to 60,000 DWT to the Ultra Large Crude Carrier (ULCC), with a range of 320,000 DWT to 550,000 DWT.

The problem facing the industry right now is one of oversupply. There are simply just too many tankers out there and the situation is even worse for oil tankers specifically. The oil tanker supply is a predominantly young fleet on average and will have more years of service before they become scrapped. This according to Tor Olav Troeim, VP of Frontline Ltd., one of the world’s largest oil tanker shipping companies. “The tanker market,” says Troeim, “may take five years before it comes back.”

Shipping rates have really fallen through the floor over the last couple of months. The Very Large Crude Carrier (VLCC), the second biggest tanker with a DWT of between 200,000 and 315,000, had a price tag of $14,477 a day in March of this year. In April, the price plummeted to $552 a day, a 96% decline, and has since recovered slightly to just $1,000 a day.

“We have to go through a lot of pain before we’re back into profitable territory,” said Troeim today at a shipping conference. “We have just started on a down-cycle that will be brutal.” The above chart reflects that pain, with a pronounced downturn in the Philadelphia Exchange Marine Shipping Index (SHX) and a recent death cross of its moving averages. As a result of Troeim’s less than rosy outlook, Frontline’s stock, whose chart is shown below that of the SHX, is trading lower by 6.5% today.