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SEA ETF in Focus on Surging Global Freight Charges

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Oil tanker rates are on the rise. Per the Clarksons Research Services, rates for very large crude carriers (VLCC) surged from $50,002 to $307,888 per day, up 516% on average.

Per a Bloomberg report, importers now have to pay around four times the average for the January-through-August period to ship West African crude to Asia. Moreover, per the same report, tanker owners are making more than $300,000 a day on the industry’s benchmark route, as of Oct 11. This compares with a month’s back earnings of $25,000 a day (read: ETFs That Topped & Flopped Last Week).

Let’s see what’s driving the rally in oil tanker prices.

What’s Driving the Upside?

The rise in oil tanker prices begun after the Trump administration imposed sanctions on certain Chinese tanker companies, including Cosco (Dalian), on Sep 25. The U.S. Office of Foreign Asset Control (OFAC) has informed that the COSCO parent company has not been sanctioned. It added that those that are included in the sanction list are COSCO Shipping Tanker (Dalian), COSCO Shipping Tanker (Dalian) Seaman & Ship Management, Kunlun Holding Co., China Concord Petroleum, Kunlun Shipping Co. and Pegasus 88. Notably, these sanctions were levied for carrying crude to China from Iran. Moreover, fearing to violate sanctions against Iran and Venezuela, the companies had to avoid using around 300 tankers.

Rising Middle East tensions have also been supporting the rising freight charge and are increasing the shipping cost for crude from the Americas, Europe, Africa and the Middle East to Asia. Price of oil tankers started to rise after the drone attacks on Saudi Arabian crude oil facilities. However, the latest incident of an Iranian ship being hit by a missile in the Red Sea has contributed to the rally.

The International Maritime Organisation (IMO) 2020 rules requiring shippers to limit sulphur emissions to 0.5% will make it necessary for tankers to be either fitted with the proper equipment or consume the compliant fuel. This is adding to the concern of limited supply of tankers in comparison to the demand and is playing a part in bumping up tanker prices, per a Bloomberg report (read: Oil ETFs in Focus Amid Trade War Blows & Rising US Supply).

Looking Forward

No mechanism to put a check on tanker prices seems to be in sight. With the IMO 2020 rule approaching and lack of significant supply of oil tankers, the surge in oil tanker prices is expected to continue.

SEA ETF in Spotlight

Invesco Shipping ETF  follows the Dow Jones Global Shipping Index, which measures the performance of high dividend-paying companies in the global shipping industry. It comprises 25 stocks with heavy concentration on the top firm. The fund has AUM of $47 million and charges 66 bps in annual fees. It trades in average daily volumes of 26,000 shares.

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