Falling Oil helps Shipping Stocks
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Ida Hansen
Falling Oil helps Shipping Stocks
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While Big Oil stocks like Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM) should be excellent long term investments despite the recent decline in the price of oil, there are sectors that do well thanks to lower energy costs.

Sailing high among those is the global shipping industry.

Few sectors suffered like shipping during The Great Recession.  When times were good before The Great Recession, many shipping companies took on a great deal of debt to build new vessels in expectations of future growth.  When economies declined instead, cargo rates fell.  There was a surplus of shipping looking for customers, which were very, very hard to find.

Compounding the situation was that fuel costs soared, especially in 2008.

For shippers, fuel is a major cost.  The increasing price created a “perfect storm” of bearish conditions along with the declining amount of cargo to be shipped and the rates that could be charged.  As a result, the shipping industry was hit very hard over the course of The Great Recession.

But that has changed with many of the macro and micro economic factors reversing.

The two most obvious are that the global economy is growing and the price of oil is shrinking.  The global economy is not growing strongly, but the United States is not in a recession, which is always bullish for other nations around the world.  This increases the need for shipping to transport goods and commodities.

Along with the increasing revenues for shippers is falling fuel costs.

Fuel is a major cost for shippers.  The more it falls, the better off are shipping companies.  United States Oil (NYSE: USO), the exchange traded fund for oil, is down nearly 40 percent for the year (chart below).  This is creating much better market conditions for publicly traded shipping companies.  That is why Frontline (NYSE: FRO), Danaos Corporation (NYSE: DAC), and others are up in recent trading.


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