ABN AMRO analyst predicts strong tanker rates in 2006
Tanker freight rates are expected to remain strong in 2006 due to increasing energy demand.
“Despite record-high crude oil prices, the world’s thirst for oil and other refined products has not subsided,” said Barry Bednar, head of freight derivatives for Dutch bank ABN AMRO, in a statement Wednesday. “We expect the global economy to remain strong in 2006, placing further pressure on crude oil production, refining capacity and the infrastructure that moves crude and its products to market.”
Bednar outlined four key factors driving tanker demand in 2006:
* OPEC oil production continues to rise to meet demand and U.S. crude oil imports are expected to surge in the first half of 2006.
* New tanker deliveries will decline in 2006 compared to last year, constraining capacity supply.
* With bunker fuel accounting for 25 to 30 percent of a ship’s operations costs, sustained high oil prices will continue to drive these prices upward.
* Political instability in oil producing regions will impact demand for overseas sources.
Bednar noted that ship owners risk volatile earnings due to the strong world demand for oil. He said the most effective way to hedge this risk is by using forward freight agreements (FFAs) — a financial contract to buy or sell the price of freight for a specific cargo route over a set future period.
FFAs can be used to hedge price volatility on liquid bulk cargoes, such as crude oil, jet fuel and gasoline, and dry freight, such as coal, iron ore and grain. FFAs are increasingly used by ship owners and energy companies, in addition to traders and investors, Bednar said.
According to the Forward Freight Agreement Brokers Association, the market for FFAs has grown to $36.2 billion since 1991. FFAs are available on an over-the-counter basis and are cleared by the Norwegian Futures and Options Clearing House.