The Freight Factor

This week crude oil prices touched the $100 per barrel mark and have continued to hover around that level. Regardless of the impact on physical demand and supply, this price does have some significance if only as a psychological threshold. With 2008 officially under way, many are trying to formulate outlooks on which direction the price of the barrel will ultimately head. Oil companies and traders could face higher stakes if the price of the barrel moves suddenly. Among the challenges these charterers’ face, managing freight volatility and rates will likely remain of concern in the future. The chart below shows the historical transportation costs on a dollar per barrel basis for the past 10 years on the common VLCC trade Arabian Gulf – Far East (260kt). Although the dollar price of crude oil has increased from the $10 per barrel to $100 per barrel, transportation costs have not increased on the same order of magnitude.