Disentangling the relationship between oil demand and tanker charter rates using frequency-decomposed components

Abstract

The bulk of crude oil is transported globally via large ocean tankers. Freight rates of these tankers show high volatility, which results in significant financial risks to stakeholders. Several factors drive these freight rates. In this study, we specifically investigate their relationships with oil demand as their major determinant. As both these time series demonstrate nonlinear and non-stationary behaviors, we use an advanced decomposition technique - Complete Ensemble Empirical Mode Decomposition (CEEMD) - to analyze their interrelationships. In this approach, we first extract various constituent cycles from both time series. These cycles are then analyzed in a pairwise fashion to detect co-movements in short-, medium-, and long-terms. Investigating the case of the United States Gulf Coast served by three major world routes, we uncovered various economic cycles as well as time-varying relationships. In general, new short shipping-based cycles were found, in addition to the anticipated medium to long cycles. While no short-term relationship was found, weak to increasingly stronger long-term relationships were uncovered, with oil demand leading the freight rates consistently. Differences across routes were also analyzed and interpreted. Our findings have a direct bearing on vessel acquisition/layoff and chartering decisions as well as for overall oil supply planning.