Research On The Relationship Of The Spot Tanker Freight And Price Of The Crude Oil Spot And Future Market

Oil is the paramount energy source in the global economy and its pricing has profound macroeconomic, political and social effects. An important element of the world oil market is the tanker industry, which moves oil from producer areas to consumer markets. Spot tanker prices are strongly influenced by the crude oil market, specifically spot prices, future contract prices, and petroleum inventories. Crude oil is commodity traded on global markets. It is subject to relative demand shifts from economic growth globally and by regions. Supply disruptions and shocks in oil exporting countries lead to price volatility. The pricing of crude and petroleum products reflects changing supply and demand including the impact of special entities such as OPEC and even Russia. The final end use price depends on production costs, refining, marketing, and transportation costs of crude oil and petroleum products from producing countries to consumer markets.The purpose of this paper, therefore, is to investigate the causal relationship between WTI futures and imported crudes, such as Nigerian Bonny. In doing so, we also consider the role of transportation costs and hence provide insights into the mechanics of the shipping freight market. Additionally, we also provide a framework for identifying mis-pricings between these markets that may lead to arbitrage profits. This paper therefore, contributes to the existing literature in a number of ways. First, although the linkages and the interrelationships between spot and futures prices for the same market have been examined extensively in the literature, there has been no study to investigate the existence of arbitrage opportunities between spot and futures markets for different types of crude; investigation of this issue gives us insight into the pricing fundamentals of oil futures markets. Second, this paper provides evidence regarding the existence of physical arbitrage opportunities between WTI futures and Brent or Nigerian Bonny; with respect to this it also identifies the magnitude of those arbitrage profits under different conditions. Finally, by investigating the causal relationship between crude oil and freight rates we obtain insight into the determination and fluctuation of freight rates. For instance, we can determine whether freight rates are responsive to the spread between WTI futures and foreign imported crudes. Similarly, we can determine whether freight rates are affected by oil futures prices in the US. These issues have important implications for the purposes of freight rate trading; e.g., if freight rates are found to be affected by the crude oil futures then this information may be used to hedge freight rate risk in the tanker sector.Given the secular and sharp rise in oil prices over the past decade, this study analyzes 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-U.S Gulf Tanker Rates, West Texas Intermediate spot and 3 month futures contract are analyzed using Cointegration and Granger causality analysis, from 2000 through 2010, 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 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.