Time segmentation in tanker freight markets: The role of risk and relative freight rates in switching decisions

This paper investigates the influence of macroeconomic and market-related factors on the chartering decisions of shipowners in the tanker segment of the ocean-going maritime industry. It introduces a methodological framework, which for a particular vessel type, highlights segmentation in the freight market based on contract duration. According to this framework, shipowners select charter contracts aligned with their risk preferences and strategic objectives, leading them to operate within a preferred “habitat” time-segment of the freight market -namely, the short-term spot market (single-voyage contracts), medium-term, or long-term time charters. A novel contribution of this study is the incorporation of global as well as shipping industry-specific risk factors. They include the risk aversion index developed by Bekaert et al. (2022), freight and crude oil price volatilities. The paper demonstrates that both global and industry specific risk factors in conjunction with relative freight rate differentials across contract durations significantly influence shipowners' selection of charter length and their potential transitions between different time-segments of the market. Using a unique dataset of 33,564 individual freight fixtures for crude oil tankers over a nine-year period, the study finds that the dominant “habitat” for VLCC and Suezmax tanker operators is the spot market, revealing a low level of risk aversion among market participants. However, changes in perceived risk and in relative freight rates can prompt temporary deviations from their preferred time-segment. The findings are in line with standard economics and finance theories and common shipping practice.