Tanker-Derivatives May Shift from Half-Century-Old System to Spur Trading

Traders and investors who bet on the cost of shipping oil may decide next week to move pricing of derivatives away from a method dating back half a century in an effort to spur use of the contracts.

About 50 users of the tanker derivatives will meet Nov. 17 to vote on scrapping so-called Worldscale points as a basis for prices, Jeremy Penn, chief executive officer of the London-based Baltic Exchange, said in an interview yesterday. If a consensus is reached, prices will be uniformly expressed in dollars a metric ton starting in January, he said.

Derivatives for tankers hauling crude oil and refined products such as jet fuel have been based on Worldscale rates since trading began nine years ago. Traders have used the dollars-a-ton basis for about 18 months to price contracts for settlement in the following year, and a vote in favor of change would extend that method to all of the derivatives.

“Worldscale is the established method for the physical market, and it works well,” Penn said. “To outsiders, though, to see the future price on a dollar-per-ton basis is crystal clear, while seeing it expressed as a Worldscale ratio is unusual and looks obscure.”

Oil companies and ship owners have used the point method of pricing since at least the 1950s, Robert Porter, managing director at Worldscale Association (London) Ltd., said by phone. The points express hire costs for tanker voyages as a percentage of a nominal rate that changes annually. Contracts are settled against freight rates provided by the exchange.

Persian Gulf

For example, as of yesterday charterers were paying 54.85 percent of the nominal rate to hire very large crude carriers on the benchmark oil-tanker route between the Persian Gulf and Japan, according to data from the exchange. Nominal rates for more than 320,000 specific routes, quoted in U.S. dollars a ton, are revised each year by the association to reflect changing fuel costs, port tariffs and exchange rates.

Those yearly alterations to underlying Worldscale flat rates make calculating future costs more difficult for derivative traders than a system of prices based on dollars a ton and left unrevised, Penn said.

Tanker derivatives trade in volumes that are about a fifth of underlying physical shipments of crude and refined products and a quarter of the size of the market for dry-bulk freight contracts, according to Penn. A change in pricing was viewed at regional meetings worldwide as a “logical step” to spur trading and open interest, or the number of contracts outstanding, he said.

Physical Market

A representative group chaired by Jeremy Harris, a freight- derivatives trader at Shell International Trading and Shipping Co., is working to change all trading of the contracts to the dollar-a-ton basis, according to Penn. Ending Worldscale’s use for pricing tanker derivatives won’t affect its role in the physical market, he said.

The association, which publishes the Worldscale rates and pricing methodology, has no view on potential changes in derivative trading, Porter said.

“The traders have to decide which direction best represents the need of their market,” he said.

To contact the reporter on this story: Michelle Wiese Bockmann in London at mwiesebockma@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net

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