Exploring the link between oil prices and tanker rates

Abstract

Given the secular and sharp rise in oil prices over the past decade, this study analyses the impact that the spike in oil prices has on tanker rates. We investigate a dynamic model explaining spot tanker rates. The magnitude of the impact of oil prices on the shipping industry, in terms of the level and volatility of spot (voyage) under bull and bear market conditions. The West African–US Gulf Tanker Rates, West Texas Intermediate spot and 3-month futures contract, and US Weekly Petroleum Inventories are analysed using cointegration and Granger causality analysis, from 1997 through 2007, in order to examine the lead–lag relationship between oil prices and tanker freight rates. Our findings show a relationship between spot and future crude oil prices, crude oil inventories and tanker rates. The significant increase of freight rates, and the simultaneous increase in oil prices, during the recent years, provides an intriguing economic environment to identify relationships between shipping market rates and oil prices. These relationships have significant implications for the markets. At the practical level, the better understanding of the relationship between freight rates and crude oil prices can improve operational management and budget planning decisions.

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