The crude oil tanker freight market’s revenues and costs are largely determined by an exchange program that brings together numerous shipping interests. For the UK and its surrounding, there is the London and Baltic Exchange group. This groups is composed of five hundred shipping transporters who agree on shipping indices.
The pricing options are usually arrived at after daily analysis of the crude oil routes in the world. The freight charges for commodities between various routes is usually published annually by a group known as Wordscale. Normally the prices are determined by the nature of ports and cost charges by each respective port. They are also determined by the distance between those ports. Taking the example of a combination between Panama and the Suez canal; its freight charges would be much higher than those between adjacent ports.
In the crude oil freight market, it is possible for consumers and suppliers to agree on a specific price. This is possible through forward freight agreements. This arrangements can occur through mutual consensus between the consumer and the supplier on a given day about a transportation service that will occur somewhere in the future. After the transaction is completed, the respective consumer foots the bill depending on prevailing international route indices. This arrangement can last for as long as three years. This arrangement is also quite consumer friendly because the following aspects can be adjusted depending on the agreement made by those respective parties
- Contract length
- Nature of route
- Time of contract initiation
- Cargo size
It should also be noted that consumers have the choice of selling off their FFA agreement to another party as long as the expiry date for the contract has not been reached. It has been estimated that the wet tanker market has a value of fifteen billion pounds in FFA contracts as of 2005.
The freight market is highly volatile. This has mostly been brought about by political factors. As of 2000, fixed charge volatility rates were a mere thirty four percent. However, after the increasing war-related activities in the Gulf, the fixed rate price volatility rates reached a whooping ninety percent. Sometimes traffic congestion in certain ports causes volatility. These congestions may be brought about by oil strikes or certain internal activities that eventually affect the availability of oil. When such events occur, then the freight rate charges soar and eventually affect the consumer. (Finnerty, 2000)