Oil Tankers: Short on Supply, Long on Profits

Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on TheStreet.com. He's also a regular contributor to RealMoney, TheStreet.com's subscription site. If you'd like to see all of Jon Markman's RealMoney commentary, click here for information about a free trial.

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One of the lessons of recent market action is that you generally want to own companies in industries where supply is tight and sell companies in industries where supply is plentiful. That may sound elemental, but it provides a pretty square framework for making decisions about investment capital allocation.

The framework would lead you to be long natural resources and trucking stocks, to be sure, and short the makers of dime-a-dozen stuff like commodity semiconductors. But the idea also takes longs into the fabulous and mysterious world of oil tankers.

To supply all of the world's crude oil needs today, there are only about 3,500 tankers steaming out on the open seas or anchored at ports. Demand for their services far exceeds this supply, and as a result, tanker rates have soared in the past year much faster than the price of crude oil itself. According to a report by McQuilling Services, an ocean-transport consultant, the world will be 26% short of big oil tankers, known as "very large crude carriers," or VLCCs, through the end of this year. (A VLCC is a crude oil tanker of at least 200,000 tons dead weight. It is big, larger than an aircraft carrier.) When you consider not just the number of tankers afloat but also the extent to which they are actually available due to port congestion, the supertanker industry appears even more tonnage deficient, according to a Bloomberg report on the McQuilling finding.

As a result of the shortage, the oil shipping business has been exceedingly profitable. Rates on the big bruisers that haul 2 million barrels of oil from the Persian Gulf to Japan hit as much as $250,000 per day last fall and are not too far off that pace today. That's a rate said to be 10 times the break-even point for tanker owners.