I've just learned that oil tanker booking fees are near record highs as oil producers scramble to ship their excess product to available storage locations, which are filling up fast. This suggests that the share price reduction in tanker companies like Frontline may be unwarranted, and they may be able to sustain their dividends in a market in which many dividends are being cut. Frontline's dividend yield is currently over 21%.
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This turned out to be a wonderfully profitable trade. I took about 10% profit late yesterday, and then bought in again this morning on the dip for another 10% ride. We're testing resistance now.
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Crude oil spot price has been rising on optimism around reopening the economy. Traders have also started to realize that there's still a reasonable amount of empty oil storage space out there, even if a lot of it is already sold. The WTI spot price is currently being squeezed between the 20-day EMA and the $20 per barrel resistance level.
A high crude oil spot price wipes out oil contango, which is bad for tankers. So if the oil spot price gets a breakout and a close above $20, that will the signal to sell tankers (perhaps even to buy puts on NAT). Personally I think it's more likely that WTI gets rejected from the $20 level and falls back below the 20-day EMA. That will be the signal for another leg up in tanker stocks.
@YBearBull, I personally exited this some time ago, and the tanker market has significantly deteriorated since I posted this, but FRO's dividend still looks good at the current price.
AdrianZen
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More thoughts on why there are such odd movements on this stock? I mean its recent highs were around the beginning of January when Crude Oil was priced at over $60, then somewhat understandably everything started sliding down, FRO devalued by half while the business only got better with increased oil production... I'm either missing something here or having hard time believing that people are missing the opportunity.
ChristopherCarrollSmith
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@AdrianZieniewicz,
There are three factors that might hurt tanker demand and reduce booking fees: 1) If oil prices strengthen and there's less demand for storage, 2) if storage fills up, or 3) if producers cut production. The odds of one of these things happening sometime soon are pretty high. And if producers cut production *for good* (e.g. the whole US shale sector goes out of business), then the effect on tanker fees will be long-term. So there's definitely risk here.
But still, this dividend is extremely high, and it's at no imminent risk of being cut, so I do think there's an opportunity here that a lot of people are missing.
rabw
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May I ask, where do you get your tanker booking fees information? Is it possible to get historical data? Thanks.
ChristopherCarrollSmith
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@rabw, Good question. I got it from news articles written by people who follow the industry. I don't know if there's historical data available in an easily accessible format.