It certainly has been a November to remember in the markets. OPEC put the cherry on November's sundae with a reported agreement Wednesday to uphold the Algiers Accord and cut production. I predicted this move in my Real Money column on Monday and, really, the cartel had no other choice. OPEC has been sitting on a 240-basis-point market share gain won over the past two years -- as I described in Monday's column -- and it was time for the sheikhs to tighten the spigot just a bit to meet domestic budgetary requirements. It's debatable how much of that 240-basis-point gain will be given back to non-OPEC players, but any possible beneficiaries are seeing big stock price jumps today, and I hope you own them.
The oil markets are nearing a supply-demand balance -- Saudi's oil minister had predicted such a balance for 2017, even without the impact of production cuts -- and it may be time to seek other sectors with more obvious dislocations.
It seems that every column I have written for Real Money over the past three months that has not dealt with energy has dealt with shipping. The Baltic Dry Index rose again today, and sits at 1,204, an indication that Chinese and Indian demand for coal and iron ore remains strong. Robust grain harvests are helping the Panamax segment of the dry bulk market, but much of those grains end up in China, too.
The market seems to finally be figuring out that the dry bulk shipping market is approaching supply-demand equilibrium. In fact, according to an Allied Shipbroking report published this week, the dry bulk order book-to-fleet ratio sits at 9.79%. This is the first time that ratio has been below 10% for 12 years. Clearly, last winter's unprecedented drop in dry bulk shipping rates shook out that industry's excess capacity. Navios Maritime (NM) remains my firm's biggest holding, but that stock and its dry bulk peers are down today, and I believe that's a sympathy move with another shipping segment that is directly affected by the OPEC action.
So, the market is selling the tanker stocks because OPEC's new found discipline is going to dent the demand for long-haul oil cargoes from the Middle East to China? Please. Maybe at the margin and to the smallest degree, but don't forget that Chinese domestic oil production is down 6.6% thus far in 2016.
I believe the Saudis and their OPEC brethren are betting that China's oil demand continues unabated. The key driving factor for oil tanker charter rates is demand for cargoes originating in what industry parlance refers to as "AG" (Arabian Gulf). As the U.S. rig count continues to expand, those AG cargoes are less needed here but still see strong demand from China. So, Saudi can stand to restrain production somewhat with the knowledge that demand from their key Asian customers is not going to abate. That will continue to support crude prices, and thus the net impact from Saudi's reported contribution of a 500,000 barrel per day cut in production to the overall OPEC reduction could be totally mitigated.
The Chinese are just as dependent on Middle East oil as ever, and I'm doing the work on the tanker stocks today as possible bargains. In a market that is pricing basically everything else at a huge premium since the election, stocks of companies that ship oil on long-haul voyages may be the only bargains left.