How ‘imaginary’ Middle East VLCC rates are having real-world effects
ANOTHER day, another hard-to-believe peak reading for very large crude carrier freight indexes. Rate assessments have long since left historical records behind amid the extended closure of the Strait of Hormuz.
Some argue that the Middle East Gulf indexes have left reality behind.
In the past, the VLCC market made headlines when rates hit the psychologically triggering six-figure threshold. These days, MEG VLCC indexes are violently swinging up and down by more than six figures from one day to the next.
The highest-profile tanker index is the TD3C: the MEG-China time-charter equivalent VLCC index. Some refer to it “as the Dow Jones of the freight markets”, said Frontline chief executive Lars Barstad on a recent conference call.
On March 12, the TD3C plummeted by $125,263 from the day before, to $326,198 per day. It spiked by $190,190 — to $601,569 per day — on Monday versus Friday. Then it plunged by $131,331 to $470,238 per day on Tuesday.
The TD2 MEG-Singapore index is showing the same historically unprecedented gyrations.
On March 13, the TD2 fell by $182,640, to $276,799 per day. It shot up $212,721 — to $489,520 per day — on Monday. On Tuesday, it rose by $138,123, to $627,643 per day.
‘To an extent, current freight is imaginary’
“We believe the volatility on TD3 mostly reflects the lack of real activity from inside Hormuz,” wrote Clarksons Securities analyst Frode Mørkedal on Tuesday. “In our view, the recent jump in [TD3] rates does not reflect the underlying market.”
Mørkedal dubbed the TD3 “unreliable as a market indicator” and said that Clarksons Securities will focus instead on TD15 West Africa-China index.
“To an extent, current freight is imaginary and does not really translate to the physical market,” Signal Ocean chartering analyst Georgios Sakellariou told Lloyd’s List.
He noted that Asian refiners wouldn’t make anything at freight costs implied by the TD3.
“So why does this freight still exist? In essence, one reason is that it doesn’t happen — literally. Since vessels cannot leave the Strait of Hormuz, we haven’t actually seen any such voyages materialising.
“Does anybody pay such freights at the moment? Nope,” he said, referring to Monday’s TD3C index level of just over $600,000 per day.
There have been TCE rates achieved that are similar to the TD3 levels, he said, but these are on shorter runs from Yanbu in the Red Sea to India.
Regarding voyages to China and South Korea from Yanbu, the highest real price Sakellariou has seen equated to $13 per barrel of freight, compared to the $18 per barrel implied by the Monday’s TD3C reading.
Yanbu used to extrapolate MEG freight
The Baltic Exchange switched the BLPG1 index, which measures very large gas carrier rates on the Ras Tanura-Chiba route, from daily to weekly beginning on March 4.
The decision was made under the rule that a benchmark can be changed or suspended “in extreme circumstances” due to “a sudden change in circumstances or markets resulting it in being impossible to produce a viable ocean bulk benchmark”.
“The Baltic very wisely decided to suspend the [daily] quotation of the BLPG1, because there’s nothing going on and if you did it, it would be wild speculation,” said Ted Young, chief financial officer of Dorian LPG, at the Capital Link International Shipping Forum on March 9.
“Given the fact that there are a number of charter rates and other things based on the BLPG1, it probably would have been irresponsible [to continue daily quotes],” said Young.
The Baltic Exchange issued a circular on March 4 reiterating guidance to panellists for assessments of routes in cases where they must use their “professional judgement” if “no direct fixtures are available”.
The TD3C and the TD2, like the BLPG1, are assessed for loadings at Ras Tanura, inside the Strait of Hormuz.
One option cited by the Baltic is to look at “negotiations or fixtures on more liquid, closely related or economically comparable routes, normalised to reflect the route being assessed”.
In the case of the VLGC market, there were no comparable routes — the majority of the VLGCs coming out of the MEG are carrying Iranian cargoes.
In the case of the VLCC market, there is rapidly escalating activity in Yanbu in the Red Sea. According to Vortexa, exports from Yanbu have risen from around 1m barrels per day typically to current levels of 3m bpd, versus port loading capacity of 4.5m bpd.
Lloyd’s List asked the Baltic Exchange on Tuesday whether panellists were looking at Yanbu fixtures and extrapolating MEG TCE rates, and if not, how the TD3C is still being published daily and not weekly like the BLPG1.
The spokesperson replied, “I can confirm that Baltic panellists providing assessments for TD3C can reference Yanbu fixtures but they need to apply a risk premium that the owner could accept to transit inside the Strait.
“All Baltic indexes are treated separately and the panellists providing data for TD3 are still able to provide daily assessments, so the Baltic continues to publish the TD3 daily,” he said.
Hypothetical numbers, real-world effects
An index that measures what the freight rate is for a VLCC with insurance that transits the Strait of Hormuz — at a time it cannot transit the strait due to war — is very hypothetical. And yet, the index has very real financial effects.
During the Frontline call, which was held just before the war began, Barstad highlighted the proliferation of floating-rate charter contracts based on indexes, as well as surging forward freight agreement trading driven by the indexes.
One example of how hypothetical index numbers translate into actual returns is BWET, the Breakwave Tanker Shipping exchange-traded fund. The BWET ETF buys near-dated FFAs to mimic spot market moves, and 90% of the FFAs it buys are priced off the TD3C.
A publicly listed VLCC owner will not earn anywhere near the current TD3C index rate. Most ships were on previously fixed voyages when the war broke out, and for new fixtures, listed companies would focus on safer loading areas in the Atlantic basin where spot rates are much lower.
Consequently, an investor or trader who bought shares of BWET is doing vastly better amid the war than a buyer of stock in listed VLCC owners — even though VLCC owner shares are doing exceptionally well.
The adjusted closing price of Frontline was up 57% year to date as of Tuesday, with Okeanis Eco Tankers up 50% and DHT up 48%. Shares of BWET were up 292%.
Year on year, the adjusted close of Okeanis was up 118%, Frontline 105% and DHT 64%. The price of BWET was up 586% year on year.
Hypothetical rate assessments have translated into massive returns for BWET shareholders, an example of being on the right side of the TD3C index moves.
The reverse applies for FFA traders and those with floating-rate contracts that happen to be on the wrong side.
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