LEARN
Learning Mode
Every concept in three lines: What is it? · Why does it matter? · How does a trader use it? Designed so a finance professional with no shipping background builds genuine commercial understanding fast.
VLSFO
Fuels- What:
- Very Low Sulphur Fuel Oil (≤0.50% sulphur), the default marine fuel since the 2020 IMO global sulphur cap.
- Why:
- It's the single biggest variable cost for most ships. The Singapore VLSFO print is the de-facto global bunker benchmark.
- How:
- A trader compares VLSFO across hubs to pick the cheapest stem and watches it against HSFO and MGO to judge blending and scrubber economics.
HSFO
Fuels- What:
- High Sulphur Fuel Oil (3.5% S). Only legal to burn at sea with an exhaust-gas scrubber installed.
- Why:
- Cheaper than VLSFO; the saving (the 'scrubber spread') is what repays a scrubber investment.
- How:
- Owners with scrubbers track the VLSFO–HSFO spread to value their fuel advantage; a wide spread means scrubbers pay back fast.
MGO
Fuels- What:
- Marine Gas Oil — a cleaner distillate (~0.1% S) used in Emission Control Areas and auxiliary engines.
- Why:
- Most expensive common marine fuel; mandatory in ECAs (e.g. US/EU coasts), so it drives cost on those legs.
- How:
- Traders budget MGO for ECA transits and hedge it via ICE gasoil, the closest liquid derivative.
Crack spread
Refining- What:
- The margin between a refined product and the crude used to make it (product price minus crude, in $/bbl).
- Why:
- It signals refinery profitability and product tightness; fuel-oil and distillate cracks shape bunker prices.
- How:
- A trader reads a strong diesel crack as bullish for MGO and a weak fuel-oil crack as supportive of cheap HSFO.
Basis
Commercial- What:
- The difference between a local physical price and a benchmark/futures price.
- Why:
- Hedges are placed in liquid benchmarks but exposure is physical and local — basis is the leftover risk.
- How:
- A bunker buyer hedging Singapore VLSFO with ICE gasoil carries the gasoil-to-VLSFO basis and monitors it.
Freight (ton-mile)
Freight- What:
- The cost to move cargo by sea; demand is measured in ton-miles (tonnes × distance).
- Why:
- Re-routings (Suez/Panama) lengthen distance, inflating ton-miles and tightening the effective fleet even without more cargo.
- How:
- A trader links disruptions to ton-mile demand to anticipate freight — and thus bunker demand — moves.
TCE (Time Charter Equivalent)
Freight- What:
- Voyage revenue minus voyage costs (bunkers, port, canal), expressed as $/day — comparable to a daily hire rate.
- Why:
- It's the apples-to-apples earnings metric across routes and vessels; the number owners actually live on.
- How:
- Traders compare TCE to daily opex/breakeven to see which segments make money and where tonnage will move.
Worldscale (WS)
Freight- What:
- An index of nominal flat rates per route; spot tanker rates are quoted as a percentage of the annual flat rate.
- Why:
- It normalises rates across routes of different distances so one number ('WS 75') is comparable year to year.
- How:
- A trader converts WS to TCE (using flat rate, cargo size, speed, bunker price) to judge true earnings.
Chartering
Commercial- What:
- Hiring a vessel — by voyage (owner pays bunkers), time charter (charterer pays bunkers, $/day), or bareboat.
- Why:
- Who pays for bunkers differs by charter type, which determines who carries fuel-price risk.
- How:
- A bunker trader checks the charter type to know whether the owner or charterer is the fuel buyer to quote.
Demurrage
Commercial- What:
- A penalty the charterer pays the owner when loading/discharging takes longer than the agreed laytime.
- Why:
- Port congestion turns into real cash via demurrage and signals tight tonnage.
- How:
- Traders watch rising demurrage as an early sign of congestion that will support freight.
Laytime
Commercial- What:
- The time allowed in the charter for cargo operations before demurrage starts accruing.
- Why:
- It defines the boundary between 'free' port time and penalty time.
- How:
- Operators manage laytime carefully; sustained overruns flag systemic port problems.
Storage economics / contango
Risk- What:
- When forward prices exceed spot (contango), it can pay to store oil — including in 'floating storage' on tankers.
- Why:
- Floating storage removes tankers from the trading fleet, tightening freight; it links the crude curve to tanker rates.
- How:
- A trader watches the crude curve: deep contango → floating storage → fewer ships → firmer freight.
Arbitrage (arb)
Commercial- What:
- Profiting from a price gap between regions once you add freight, e.g. moving product from a cheap to a dear market.
- Why:
- Arbs drive cargo flows, which drive ton-miles and bunker demand at the loading/discharge hubs.
- How:
- A trader checks whether the regional price spread covers freight; an 'open arb' means cargoes (and bunkering) will move.
Hedging
Risk- What:
- Offsetting price risk with derivatives — bunker swaps, ICE gasoil, fuel-oil swaps, or FFAs.
- Why:
- Bunkers and freight are volatile; hedging locks margins for a developing trading book.
- How:
- A trader hedges a fixed bunker sale by buying a matching fuel-oil swap, leaving only basis risk.
FFA (Forward Freight Agreement)
Risk- What:
- A cash-settled derivative on a freight route or index (e.g. a Baltic TD route), settling vs the published assessment.
- Why:
- It lets owners and charterers lock future freight (and indirectly bunker exposure) without a physical ship.
- How:
- An owner sells FFAs to fix forward earnings; a charterer buys them to cap freight cost.