The revolution in Egypt may have provided a little pump for the shipping exchange traded fund (ETF) as companies capitalize on possible disruptions in the region’s shipping lanes, but there’s still a risk.
Problems in Egypt and potential disruptions in normal operations of the Suez Canal could disrupt tanker shares, writes Susan J. Aluise for InvestorPlace. But a small assurance on Monday that a shutdown was less likely to occur allowed tanker companies to regain some of their positions, more notably shares of Frontline (NYSE: FRO), Overseas Shipholding (NYSE: OSG), North American Tanker (NYSE: NAT) and General Maritime (NYSE: GMR).
That has, in turn, given Guggenheim Shipping (NYSEArca: SEA) a lift. Several tanker companies account for a large chunk of the ETF. Frontline is 3.8% and Overseas Shipholding is 4.2%. Other tanker companies in the fund include Teekay LNG (4.3%) and Taskos Energy Navigation (4.2%).
Dahlman Rose CEO Simon Rose recently commented that “if you’re looking for a hedge on a crisis, I think that shipping is a very interesting, discounted, way of playing it right now.” Around 1 million barrels of crude oil and refined petroleum products, along with 8% of global shipping, goes through the Suez Canal daily.
The risk, of course, is that any disruptions will force tankers to go around South Africa, which adds up 6,000 miles or 16 days of added costs. But it may not be all bad for shippers.
If shipping costs increase, then shipping companies will likely generate better earnings as a result of higher margins on crude and refined products, which will allow companies to raise prices instead of switching to dry goods.
When the Suez Canal was shut down back in 1967, freight rates increased five-fold and competition among shipbuilders increased capacity and gave rise to the supertanker. In 2004, the canal was closed for three days and delayed 135 ships, which pushed tanker stocks up 24% in the following three weeks.
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Max Chen contributed to this article.