Run Up in Crude Prices Outpaces Baltic Dirty Tanker Index

The Baltic Dry Index is closely followed as an indicator of global economic activity with good reason; it captures the movement of iron, coal, and grains across oceans. For some reason, another index, the Baltic Dirty Tanker Index is ignored. This index maps the prices for shipping crude oil (think FRO, NAT, TK). I introduced this index earlier this year when it was at 485. I predicted the index would rise. It did to 720 before crashing down to a low of 469 where it is today.

Today I'm highlighting the index as a means of gauging the demand and supply of oil. Clearly the index is heavily influenced by the number of ships competing for transporting oil. However, the number of vessels doesn't change drastically month to month. Therefore, the index gives a rough idea of what the oil market is doing absent speculative pressures.

This year's BDTI has cratered. The rates to charter tankers are bumping along the floor of the ocean.

Contrast this to the price of oil which has risen strongly off its lows.

The last six months indicate a disconnect between the BDTI and the price of crude. The rise in crude since March is not reflected in traffic on the oceans. This raises doubts about whether the rise in crude prices reflects real market conditions.

The discrepancy between the price of crude and the price to ship cannot continue. Either shipping rates rise or crude prices fall.

Comments

[john s. gordon:]

'absent speculative pressures'.
that is the key phrase in this article.
> jack

Sep 06 12:13 PM

[RECESSIONPROOF:]

its simple, same as baltic indices crude oil is speculatively driven asset class, the more volume is in futures so moves are wider
but fundamenally baltic indexes are bigger picture

Sep 06 03:02 PM

[sethmcs:]

Physical oil demand verses paper oil demand. Apparently more people want paper oil rather than physical oil. Still waiting for oil to go to $30 bbl.

Sep 06 06:11 PM

[ClayBoy:]

This may be more of an indicator of inflation which will rear its ugly head soon. Thanks to our great president and congress spending more money than the last four presidents combined.

Sep 06 11:38 PM

[one eye:]

Not to worry, Tanker rates will go up. This is the last year for the Single Hull type. Many new Dbl Hull deliveries were cancelled, with penalties taken, or stalled sitting in various stages of being built.

Come 2010 the supply of ships will be reduced and any kind of Western recovery will lead to the greater usage of a smaller worldwide fleet regardless of the price of oil.

Sep 07 03:47 AM

[Dax1:]

But, I believe the BDTI also moves with Physical freight demand and paper freight demand. One can trade Forward Freight Agreements (FFAs).



On Sep 06 06:11 PM sethmcs wrote:

> Physical oil demand verses paper oil demand. Apparently more people
> want paper oil rather than physical oil. Still waiting for oil to
> go to $30 bbl.

Sep 07 04:15 AM

[JS Partners:]

You are right - there is a discrepancy. This is mainly because oil futures are controlled by financiers who tend to swing markets to the extremes. They also tend to be ahead of the curve.

Take note that a lot of tankers are going to have to be double hulled over the next couple of years. New regulation will have a serious impact on tanker capacity and transportation.

Sep 07 10:01 AM

[Say What?:]

ClayBoy, Bush and Cheney spent the money - Obama just got the bill. Have you forgotten "Deficits don't matter" ?


On Sep 06 11:38 PM ClayBoy wrote:

> This may be more of an indicator of inflation which will rear its
> ugly head soon. Thanks to our great president and congress spending
> more money than the last four presidents combined.

Sep 07 03:34 PM

[yank:]

If you are waiting for $30 bbl oil you are going to be waiting a LONG TIME. OPEC has zero interest in seeing oil go below $60 due to its massive CAPEX scheduled for the next 5-10 years. All of those projects are only viable if oil is above $60. Not to mention the fact that deep-sea finds like the one BP hit last week in the GOM require oil prices to remain over $60 in order to justify the expense of drilling that deep. I don't think the avg person has come to grips with the new paradigm, "peak oil". Peak oil does not mean that oil is running out. It just means that it is now in "hard to get at" places that require expensive equipment to reach. There is no free lunch. Oil at $30 bbl kills alternative energy and does nothing to "wean us off" fossil fuels. My prediction is that we will never see oil again at $30. Sorry about that, oil bears.

Sep 07 06:46 PM

[realold:]

Look at the price of oil in euros. Not so high. All the negative news and comment around the world should lead to less investment in oil - higher prices? Or, more investment - economic recovery - higher oil. Or, inflation and collapse of the dollar - higher oil. Or, the end of civilization - lower oil. Take your pick.

Sep 07 10:09 PM

[umuculus:]

<< Mr. Rosenman >>

I don't know why you named your Index--the "Dirty" Tanker Index. Tankers are well maintained. The crews job is to elimininate rusty areas and keep the tanker painted to protect from the elements,both inside and out. Tankers are better maintained than any other vessel class. I should know.I sailed on a super tanker for two years.My job was to keep the ship looking spic and span and as bright as the day it was launched.

Sep 08 01:17 AM

[Obamitall:]

The reference is aimed at the product the ship carries.


On Sep 08 01:17 AM umuculus wrote:

> << Mr. Rosenman >>
>
> I don't know why you named your Index--the "Dirty" Tanker Index.
> Tankers are well maintained. The crews job is to elimininate rusty
> areas and keep the tanker painted to protect from the elements,both
> inside and out. Tankers are better maintained than any other vessel
> class. I should know.I
> sailed on a super tanker for two years.My job was to keep the ship
> looking spic and span and as bright as the day it was launched.

Sep 08 08:28 AM

[Malkiel:]

"The reference is aimed at the product the ship carries"

Nonetheless, I'm impressed by our friend's dedication. I'm thinking I should take my next cruise on a tanker rather than one of those filthy cruise ships. I move the index be renamed the "nomuculus" index on account of there being no muck there to speak of due to his efforts...:)

Sep 15 02:24 PM