Portfolio Management of Tanker Freight Risk

Intertanko’s Rotterdam Tanker EventMonday 15th April 2002Jim Gretton – Global Freight Forwards

What some Owners doAcquire shipsSell ShipsFill intervening time as best as can - take period cover if cash flow dictates and a T/C is available - might do some contract business - take spot market wherever ship happens to beFor all period business, tomorrow is higher than today

Alternative Trading Method – Portfolio Management

For each forward time period, assess freight longs/shorts – LONG means you benefit if rates go UP (eg Owning a ship) – SHORT means you benefit if rates go DOWN (eg having T/Chartered out) – match by period (eg Month), vessel size (eg VLCC), region (eg AG) – net off longs against shorts to determine your net positionAssess your opinion of forward markets – forecast state of global economy – forecasts of likely oil demand (eg EIA, OPEC) – market sentiment Match your forward position with your forward opinion – are you happy? – if not, FIX IT! – can still Time Charter (out or in) or do Contracts, but also FFAs

What is a Freight Forward Agreement?

Can be ‘Over-the Counter’ agreement or traded on an Exchange via a screen‘Contract for Differences’ (CFD) – means cash settlementUses a specified notional voyageFixes a price today for a defined future periodPosition closed out against an Index or Broker assessment over the defined future period

FFA Compared to Time CharterPros

No physical performance riskMore liquid than Time CharterWith standard terms, quick to doFlexible volumes, regions and selective timingsKeeps control of your physical assets

ConsMay not get perfect match with desired voyage/timingCan have bunker price exposure (unless hedged)

Baltic International Tanker Routes

TD1, 280kt AG – US GulfTD2, 260kt AG – SingaporeTD3, 250kt AG – JapanTD4, 260kt W Africa – USGTD5, 130kt W Africa – USACTD6, 130kt cross MedTD7, 80kt, cross N.SeaTD8, 80kt, AG-SingaporeTD9, 70kt, Caribs – USGTD10, 50kt, Caribs – USAC

TC1, 75kt clean, AG – JapanTC2, 33kt clean, UKC – USACTC3, 30kt clean, Caribs – USACTC4, 30kt clean, Sing - Japan

Using FFAs to Adjust the Portfolio

Identify period/region of concernTranslate exposure into tonnes/month on appropriate BITR routeCompare your opinion of forward rates with available bids/offers in the FFA marketIf FFA numbers are better than your own view, tradeREVIEW REGULARLY!

Eastco VLCC Exposure, AG-Japan

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3 VLs LongTerm Cargo ShortsNet Position

250kt AG-Japan, Spot Market

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Spot Market

250kt AG-Japan, Spot Market and 3rd Quarter Forward Market

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Amended Eastco VLCC Exposure, AG-Japan

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3 VLs LongTerm Cargo ShortsFFA SaleRevised Position

Systems & ControlsNeed for review means that all physical freight deals must be entered in an exposure system Must ensure all FFAs are entered promptlyShould value all paper deals on a ‘mark-to-market’ basis dailyReport on on-going counter-party exposureControl on max outstanding at any one time