An empirical analysis of relationships between cyclical components of oil price and tanker freight rates

Abstract

Oil prices directly impact its global transportation operation, which is mainly served by ocean tankers. Significant financial risks are observed by tanker transporters, which are attributed to uncertainties rooted in the complex non-linear stochastic relationship of oil and freight prices. The non-linearities in both prices are due to multiple factors inducing unique price sub-cycles of different timescales, which makes direct price co-movement analysis a flawed approach. To better address this problem, we propose an approach where we first extract constituent cycles, inter-relationships of which are then pairwise analyzed on corresponding timescales. We employed the Complete Ensemble Empirical Mode Decomposition (CEEMD) method for extracting the constituent cycles. A cross-correlation study was then performed between pairs of oil and freight price cycles. Using data from four major global tanker routes, we found several known and new shipping-based cycles. In terms of co-movements, we see increasingly strengthening relationships in medium to longer terms – mostly led by oil prices. Our findings highlight dissimilarities in relationships across routes that are attributable to route characteristics and tanker types.