16 JANUARY 2022

This week we selected a long-time relationship for our 'Chart of the Week'. We show the Clarksons Index as a proxy for the overall shipping TCE (dark blue line) on the left axis and the IFO 380 bunker price (light blue line) on the right axis. We see a strong correlation between both time series with a noticeable disconnection in the period from 2009 to 2015 when shipping markets became heavily under pressure as a result of the financial crisis. One may argue that correlation does not necessarily mean causality. Still, we deem there is a causality because the bunker prices are clearly driven by the underlying oil price which is an exogenous variable to the shipping markets. 

Where does this correlation come from? From a shipper's perspective, the cost for transporting goods follows a classical 'Cobb-Douglas' production formula. The total cost for shipping is determined by the cost of chartering the vessel and the cost for the bunker. Both input factors are somewhat linked to each other. Shippers can reduce their bunker bills by ordering the vessels to slow down their speed. This would increase the demand for vessels if the same transport volume was to be maintained during a specific period of time. As a result, TCEs might increase as the supply of vessels is constrained in the short run. Current oil prices around USD/barrel 80 are quite high in a historical context, and we are very much tempted to expect lower oil prices in the following months. On the other hand, the fossil markets underwent a period of three to five years of underinvestment in exploration and the development of oil fields. Therefore, we would rather assume the oil price to remain elevated for the next years which, in turn, would be great news for shipowners as TCEs should benefit.

The second trading week in 2022 depicts a remarkable relative strength of the shipping equities against the broad capital markets, and especially against growth stocks from the tech sectors. Valuations, dividends, and earnings growth clearly support the shipping sector, and investors seem to be willing to reward this. 

The offshore sector had another strong jump of 4.3% w-o-w, thus we will take a closer look at it in the following weeks. If our price theory proved right, offshore-service companies would benefit in the months ahead.

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