1/ Below is a 20y chart of oil prices and the Baltic Dry Index.
Aside from being economically sensitive, there are a number of other reasons the two follow each other quite closely.
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Aside from being economically sensitive, there are a number of other reasons the two follow each other quite closely.
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2/ As the oil price rises, ships slow down to achieve better fuel economy and save on fuel costs.
In a high oil price environment, ships will slow until the lowest total cost of operation is found.
This slowing reduces effective capacity and causes charter rates to rise.
In a high oil price environment, ships will slow until the lowest total cost of operation is found.
This slowing reduces effective capacity and causes charter rates to rise.
3/ Both ships and oil also tend to follow the same investment cycle where a boom of investment leads to a supply glut, ensuing bust, and a long period of under-investment which sets up for another period of high rates. Rinse, repeat.
4/ Even though demand growth for both oil and #drybulk trade has been muted in recent years as global GDP growth slows, underinvestment this cycle has been especially acute leading to high rates for both, and extremely favorable outlooks going forward.
https://twitter.com/AllVentured/status/1488371615465230339?s=20&t=qGSKBF6dD03MQT3v1q0dLg
5/ But whereas oil now has short cycle shale always threatening to crash the party 18 months from now, ships ordered today are now taking 3 years before they deliver and capacity to add ship supply is limited.
https://twitter.com/AllVentured/status/1515601052711763969?s=20&t=qGSKBF6dD03MQT3v1q0dLg
6/ Although both oil prices and drybulk rates tend to follow the same long cycle, the two often diverge for months and years before reconverging as each market has its own idiosyncrasies and seasonality.
7/ With both markets very tight and #drybulk now coming off its seasonal lows, will #drybulk rates and equities be the relative outperformers?
History suggests they just might...
History suggests they just might...
https://twitter.com/AllVentured/status/1519422744265383936?s=20&t=qGSKBF6dD03MQT3v1q0dLg
8/ The other important takeaway from the 20y chart is that #drybulk and shipping in general is a very high beta play on the investment cycle with the largest relative value changes peak to trough... a little extra juice if you see an extended period of inflation coming.
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