How to use key crude tanker rates to make better investments

Market Realist

An overview of crude tanker industry (Part 8 of 10)

(Continued from Part 7)

Benchmark for industry rates

Is there a benchmark rate that we could use to see what rates companies could be receiving? Yes there is, and it is called the Baltic Dirty Tanker Index (chart next part), published by the Baltic Exchange. The index aggregates rates from major trade routes every day, and is a good indicator of overall shipping rates hired to move crude oil.

Benchmark for various ship class

As mentioned in the earlier part of this series, VLCCs, Suezmax and Aframax make up most of today’s crude tanker industry fleet. Due to differences in size, they aren’t all used to haul crude oil across same trade routes. In areas where water depth is shallower and width is narrower, smaller vessels are preferred. But for long haul purposes, VLCC is the standard. Thus, the benchmark routes for these vessels differ.

Benchmark routes for VLCCs typically begin in Middle East (Arabian Gulf) to South East Asia and Japan, Europe, and United States. VLCCs are also used to move oil from West Africa to places like United States, Europe, and South East Asia. Suezmax vessels are employed on similar routes, but usually for slightly shorter distances like South America to U.S. Gulf, Black Sea (near Turkey) to Europe, and West Africa to U.S. Gulf. Aframax are used to cover intra-regional locations like around Gulf of Mexico (South American and United States), Mediterranean Sea (Africa, Middle East and Europe), and North Sea (United Kingdom and Norwegian countries). Note that the map above includes product oil trades.

Overall or specific benchmarks?

For the majority of investors, looking at rates for specific trade routes isn’t very important, because vessels are substitutable. If rates for Suezmax go down as a result of lower trade volume, it can lead to a spillover effect on VLCC and Aframax rates. Thus, it’s important to look at the overall picture instead of just one part. Over the long-run, substitution characteristics will raise or sink all boats. But there’s usually a few weeks of lag time, which could help investors understand the source of driver. Plus, rates for Suezmax will likely be more pressured compared to VLCCs, so companies with larger exposure to Suezmax could underperform from time to time.

Continue to Part 9

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