Shipping brokers advise tanker chartering rethink

Tanker markets in the second half of 2000 have been more volatile than at any time since the 1991 Gulf War, and as a result oil companies might have to rethink their chartering strategies, brokers say.

November racked up a record change of 115 worldscale points in the space of just 24 hours in Caribbean markets, beating the previous record of 93 points set in 1997. "The market is volatile not from growing demand, but from shrinking supply as age discrimination cuts into ship availability," said U.S. tanker broker Poten in a recent report.

"Perhaps it is time for oil companies to rethink...(their) exposure to the spot market." The Poten analysis of tanker volatility showed that in the Caribbean the standard deviation of freight rates - a measure of volatility - varied between 14 and 32 between 1995 and 1999, but this year it has soared to 58.

"Rates can drop precipitously when three ships are chasing two cargoes, only to subsequently jump when three cargoes are chasing two ships," Poten said. Typically, charterers hedge against volatility by using long-term charters or through freight futures contracts.

On November 8, charterers of 70,000 tonners for Caribbean cargoes somehow all went for the same window. Charterers that failed to fix earlier in the day ended up paying about 100 Worldscale points ($4.40 per tonne) more than those that got in first. The greatest volatility has been in the Caribbean market, but in the North Sea market this year, rates have repeatedly gained or lost over W100 in the space of just a few days.

Such an environment is risky for tanker owners and charterers alike. Poten says that the most cost effective strategy for charteres from 1973 to 1999 has been to fix ships largely through the spot market, but it warns that this "26-year winning streak" might be just about to change.

"As a chartering manager, the worst thing that can happen to you is to find yourself without a ship - that's even worse than paying too much," said one London-based tanker broker. "And with the current perception that there are not enough quality ships, that's what leads to volatility."

"I find it surprising in this market that oil companies in general haven't taken more time-charter tonnage, especially given that there are no signs of a prolonged downturn in freight rates," he added. Very little time charter business has been done in recent months however, because tanker owners and charterers cannot agree on the appropriate daily hire rates.

Hetco was yesterday reported to have taken the modern million-barrel tanker Venetia at just under $35,000 per day for three years, while Emerald will pay a similar amount for the million-barrel Wilimina for 30 months. Exxon, however, has been in the market for a five-year VLCC time-charter since the end of August, but has so far balked at owners' best offers of $33,000-$34,000 per day on single hulls.

Equally, tanker freight futures markets are relatively quiet, again because of ship owners' extreme confidence. "Sellers of near-term freight futures are non-existent right now," said a
broker, "and they can't see the market cooling off." There are about six tanker owners selling future contracts for the end of 2001 and the start of 2002, but brokers say the charterers are not keen to buy that far forward.