The Ships That Cost a Fortune One Year and Nothing the Next
The market for oil tankers swings wildly because the supply of ships is fixed in the short run and demand shifts suddenly. Day rates can multiply and collapse within a single year.
Renting a Ship by the Day
Moving crude oil across oceans is done by tankers, the largest of which carry enormous volumes. Oil companies and traders that need to move oil hire these ships, paying a day rate, the cost of chartering the vessel per day, which is set by the balance of ship supply and shipping demand.
That day rate is one of the most volatile prices in shipping, capable of swinging from barely covering the ship operating costs to extraordinary levels within a single year. Understanding why reveals a general truth about markets where supply is fixed in the short run.
The number of ships cannot change for years, but the demand to use them changes in weeks. That mismatch is what makes tanker rates swing so violently.
Why the Swings Are So Violent
The extreme volatility comes from the combination of fixed short term supply and variable demand. The number of tankers in the world is essentially fixed at any moment, because building a new ship takes years. Demand for shipping, meanwhile, shifts quickly with oil trade flows, disruptions and the state of the oil market.
| Condition | Effect on day rates |
|---|---|
| Ship supply | Fixed for years, cannot respond quickly |
| Demand rises | Rates spike, no new ships available |
| Demand falls | Rates collapse, ships still exist |
When demand for shipping rises against a fixed fleet, there are no spare ships to add, so the rate must rise sharply to ration the available vessels. When demand falls, the ships still exist and compete for scarce cargoes, so rates collapse toward the operating cost. Because supply cannot flex, the entire adjustment falls on price, producing swings far larger than the underlying change in demand.
The Storage Connection
Tanker demand is not only about moving oil. Ships can also be used to store oil, and when the oil futures curve is steeply in contango, making it profitable to store oil and sell it forward, traders hire tankers as floating storage.
This removes ships from the transport market at the same time, tightening the supply of vessels available to move oil and pushing rates up. A period of wide contango can therefore drive tanker rates higher through two channels at once, as ships are both in demand for storage and scarcer for transport. When the contango unwinds, those ships return to the transport market, adding supply and pushing rates down.
The Building Cycle
The fixed supply is only fixed in the short run. Over years, high rates prompt owners to order new ships, and because ships take years to build and are ordered in waves when times are good, they tend to arrive together, often after the conditions that justified them have passed.
This produces a classic capacity cycle: high rates trigger ordering, the ships arrive in a bunch years later, the added supply depresses rates, ordering stops, the fleet ages and shrinks, and rates eventually recover to trigger the next wave. The long lead time between ordering and delivery is what makes the cycle so pronounced, since decisions made in good times deliver capacity into conditions no one can predict.
The Scrapping Floor
There is a mechanism that limits how low rates can go for long. When rates fall below operating costs and owners see no prospect of recovery, older ships are sold for scrap, since the steel has value and running the ship loses money. This scrapping removes capacity and eventually helps rates recover.
The age of the fleet and the scrap price therefore matter, since a market with many old ships near retirement can rebalance faster through scrapping than one with a young fleet that will keep operating even at low rates. Scrapping is the supply side safety valve that eventually corrects an oversupplied market, though it can take time.
The Bottom Line
Tanker day rates swing violently because ship supply is fixed for years while shipping demand shifts in weeks, forcing the entire adjustment onto price. Rates spike when demand rises against a fleet that cannot grow and collapse when it falls, amplified by floating storage that pulls ships out of the transport market when the oil curve is in contango. Over the long run, high rates trigger waves of newbuilding that arrive together and depress rates, while scrapping of old ships eventually removes excess capacity, producing a pronounced cycle driven by the long lag between ordering a ship and sailing it.