Published On: Wed, May 29th, 2013

Is Shipping and Oil ETF Co-Relationship a Bullish Indicator for the Global Economy?

A recent article in the Financial Times detailed how institutional investors and others such as billionaire Wilbur Ross have been taking positions in the depressed shipping sector.  Ross has done very well in distressed assets, and shipper stocks have surged in recent trading, although it has a long voyage ahead before it fully recovers from The Great Recession.  In a bullish pattern, though,  the exchange traded fund for shipping, Guggenheim Shipping (NYSE: SEA), is vectoring higher along with the exchange traded fund for oil, United States Oil (NYSE: USO).

This has not always been the case.  As the chart below shows, many times the USO and SEA diverge.  Each, however, should move in unison as the USO and SEA both rise when the global economic is booming.  The more economic activity there is, the greater demand there is for oil to power the factories and vehicles, among others.  The more produced, the more ships are needed to haul the commodities to the factories making the items, and then again to take the goods overseas to customers.

price history

But The Great Recession and its aftermath ruptured this co-relationship.  Oil trading has remained high after The Great Recession due to monetary policies.  But shipping has collapsed.  Before The Great Recession, there was tremendous overbuilding in the shipping sector.  When the demand for shipping collapsed, so did the charter rates due to the oversupply.   The high price of oil contributed as fuel is the largest expense for a shipper.

Better economic conditions from late 2012 resulted in that divergence again.  The USO fell after the initiation of Quantitative Easing III by Ben Bernanke as the flood of US Dollars overwhelmed speculators who piled into the oil ETF, betting it would rise at it had after previous economic stimulus efforts.  But the improving data from the United States and the economic stimulus package introduced in China lifted the share price of the SEA.  The SEA rose on fundamental economic demand as the USO fell as speculators abandoned commodities.

But, as the table below shows, both the SEA and USO are now again moving higher in unison.

Share Price Week 0.53% 2.25%
Share Price Month 8.23% 12.50%
Share Price 6 Months 5.35% 10.77%
Share Price Year 2.07% 17.23%

Source: Finviz

That is a very bullish indicator.  It shows that global economic growth has both shipping and oil in demand.  Even more important, it reveals that the basic forces of market demand are suppressing the speculative interests that before imposed a split in the direction of the SEA and the USO.

This is buttressed by the improving performance of the Baltic Dry Index, which is up 8.73% for 2013.  It measures  cargo rates for transporting dry goods such as coal or lumber.  Based on that, the Baltic Dry Index is valued as it tracks economic, not speculative activities: no one orders lumber unless it is needed for a construction project.

The global economy is still weak, make no mistake.  If it was not, there would be no need for the quantitative easing actions presently being taken by the central banks for the United States, Europe, Japan, and China.   But the movement of the SEA indicates that economic activity is improving. The SEA has more than ten shipping stocks in it, so there is a broad exposure to the sector.  It is moving in a very bullish pattern, particularly when reinforced by the surge for the Baltic Dry Index this year.  The trend is also reassuring as the gain for the last month is higher than the six-month rise, which is movement in a positive direction.

For the USO, that also holds true.   Even more bullish for the USO is that the 8.23% month gain is greater than the six month spike of 5.35%.  Both that easily top the bump over the last year of just 2.07%.

If the USO and SEA continue to rise together, augmented with the Baltic Dry Index climbing higher, that is a very bullish trend that traders should follow for future profits.



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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.