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Why Did Time Charter Rates for Crude Tankers Fall?

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Mar. 12 2016, Updated 4:05 a.m. ET

Time charter contracts

VLCC (very large crude carrier) time charter rates fell in the first week of March. Before this decrease, there wasn’t a significant move in the last few weeks. Volatility was almost nonexistent. Rates leveled off at a comfortable level according to Alibra Shipping.

Under time charter contracts, vessels are hired for a specific period at a pre-decided daily rate. Rising time charter rates give a brighter outlook for the crude (DBO) tanker industry and vice versa.

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Tanker companies and time charter contracts

Higher time charter rates give an opportunity for companies like Teekay Tankers (TNK), Frontline (FRO), DHT Holdings (DHT), Tsakos Energy Navigation (TNP), and Euronav (EURN) to lock in high rates for a longer time. Time charter contracts give a stable and predictable cash flow. Nordic American Tanker (NAT) doesn’t operate in the time charter market.

Time charter rates

Time charter rates rose significantly for the past year. In December 2014, VLCC time charter rates for one year were around $34,500. For three years, the time charter rates were around $33,000. On March 2, 2016, the VLCC time charter rate for one year fell by 3% to $42,500 from the prior week’s $44,000. The two-year and three-year VLCC time charter rates fell by 2% and 3%, respectively.

The Suezmax and Aframax time charter rates also fell. According to Alibra Shipping, this week the time charter fixtures remain sparse in the crude segment with very few charters willing to take tonnage.

Forward freight agreements

FFA (forward freight agreement) is a forward contract used to hedge exposure to freight market risk. These rates don’t predict future rates. However, they can be used as a tool to gauge market sentiments. The VLCC FFA rates for the second quarter are $49,500, according to the Gibson’s Tanker Report. The Suezmax and Aframax FFA rates for the second quarter on March 4, 2016, are $32,000 and $27,250, respectively.

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