- 13 Nov 2019
- By Paul Wightman
Interest in Freight futures and options is rising as companies look to manage greater potential volatility in the cost of shipping. Uncertainties caused by the forthcoming International Maritime Organisation (IMO) rules in 2020 are creating an uncertain price outlook and market participants are managing this risk via the Freight futures and options markets. An increase in US energy exports to Asia and Europe, brought about by the rise of US shale, has also seen a significant increase in the freight miles per barrel. The latest uncertainty in September 2019 following a decision by the United States to impose sanctions on the entities of COSCO, a large Chinese shipping conglomerate has also fuelled the interest in freight derivatives hedging. The COSCO restrictions come on the back of an already tight shipping market, due to changes resulting from IMO, which has pushed charterers into the market to secure vessels where the supply of tonnage available for charter is falling.
One of the most active freight routes is the Middle East to Japan (TD3C1) for Very Large Crude Carriers, due to the volume of oil exported to Asia. According to data from the 2019 BP Statistical Review of World Energy2, Middle East crude flows to Asia (Japan, China and Singapore) was 374 million tons. Assuming everything was hedged in the freight market on a 1:1 ratio, this would equate to around 374,000 lots (based on a lot size of 1,000 metric tons), emphasising the importance of this route. Freight prices on the Middle East to Japan route (TD3C) rose to a peak of over $45 per metric ton in mid-October but had fallen back to arounds $25 per metric ton towards the end of October 2019, well above long-term historical levels of between $10 and $12 per metric ton.
The US has emerged as a significant player on the world crude oil markets with higher volumes of US grades flowing to Asia and Europe. According to the US Energy Information Administration (EIA) data, South Korea has become the most significant destination for US crude oil behind Canada. Higher shipments of crude oil from the Middle East to Asian markets has also increased demand for using price risk management tools such as futures and options.
The Baltic Exchange and S&P Global Platts referenced routes from the US Gulf Coast to China and Europe were launched by CME Group in 2019 to cater for this demand. Asian buyers across the region including South Korea have turned to the US to China export routes to hedge freight costs. The futures price for January 2020 freight on the US Gulf Coast to China route has risen 24% since July 2019 to around $9.7-mil, just slightly below the mid-October peak of over $10-mil. Futures trading volumes on the US Gulf Coast to China route also hit a record 600 lots in October 2019, according to CME Group data.
Source: Energy Information Administration
On the back of heightened volatility, charterers have turned to the futures markets to hedge freight risk, pushing exchange volumes higher. Based on the latest exchange data, total traded volumes in Freight futures peaked at over 11,000 lots in September 2019 and have remained at robust levels in October 2019, more than doubling the volumes from 12 months earlier. CME Group freight options were also traded for the first time in September 2019 reflecting a growing appetite by the traders to use additional financial instruments to hedge an underlying freight risk.
Increased volatility in the freight markets is seeing renewed trader interest in Freight futures as companies look to manage a greater price risk exposure to the underlying cost of shipping. These higher trading volumes are attracting new market participants as they look to diversify into alternative markets. Higher crude flows from the US coupled with increasing volumes of oil being shipped to Asian markets from the Middle East is seeing volumes rise on these specific routes. As futures and options volumes increase, this is in turn increasing the diverse nature of counterparties gaining access to CME Group freight products.
- CME Group Tanker Freight – TD3C https://www.cmegroup.com/trading/energy/freight/tanker-route-td3-middle-eastern-gulf-meg-to-japan-250k-metric-tons-freight-swap-futures_contractSpecs_futures.html
- BP Statistical Review of World Energy report https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2019-full-report.pdf
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