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SEA ETF a Buy on Rising Freight Costs Due to Mid-East Crisis

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Rising Middle-East tensions have been bumping up freight charges and shipping costs for crude on key routes like from the Middle East to China, India, United States and Europe. In fact, the world’s largest oil-importing region— Asia — is still largely dependent on the Middle East for crude. The rates quoted for the supertankers shipping crude from the Persian Gulf to China vary between 165 and 180 in Worldscale terms (per a Bloomberg article). Before rising to this point, the rates were between 140 and 150 Worldscale points in the earlier part of this week. These rates compare with 122 before the U.S. airstrikes on Jan 3 (read: ETFs to Buy as Flare-up in Middle-East Tensions Spurs Volatility).

Let’s look at the major reason driving freight charges.

Iran Retaliates

In retaliation to the killing of their top Iranian commander Qasem Soleimani, Tehran fired more than a dozen ballistic missiles at least two Iraqi military bases holding U.S.-led coalition personnel. Moreover, Iran has announced plans of not following the limits on its enrichment of uranium, as under the Joint Comprehensive Plan of Action (JCPOA) (read: Country ETFs to Top/Flop on US Air Raid at Baghdad).

Other Factors Driving Freight Charges

The spike in oil tanker prices started after the Trump administration imposed sanctions on certain Chinese tanker companies, including Cosco (Dalian), on Sep 25, 2019. 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. 

The International Maritime Organisation (IMO) 2020 rules requiring shippers to limit sulfur emissions to 0.5% will make it necessary for tankers to be either fitted with the proper equipment or use the compliant fuel. This is adding to the concern of limited supply of tankers in comparison to the demand and is playing a role in bumping up tanker prices, per a Bloomberg report.

In fact, no mechanism to put a check on tanker prices seems to be in sight. With the Middle-East tensions expected to flare-up, imposition of the IMO 2020 rule  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 $49.5 million and charges 65 bps in annual fees. It trades in average daily volumes of 35,000 shares (read: Beyond Biotech, 5 ETFs Up At Least 10% in Q4).

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