The Product Tanker Investment Decision: The Impact of Oil Price Volatility and Ship Design Issues

Emma Christina Norton & Mia Quarfood

Student thesis: Master thesis


The purpose of this thesis is to assess the key factors determining the profitability of an investment in a product tanker newbuilding. The analysis evaluates whether ship design issues have become more important for the product tanker investment decision through the impact of new environmental regulations, and whether recent oil price volatilities have changed such investments in fundamental ways. The case of a 38 500 DWT product tanker was applied in order to meet the research objective. First, an investment model was constructed to measure the impact of different investment factors; freight rates, newbuilding prices, bunker fuel prices, and interest rates. The volatility of the crude oil price was then assessed, and a one-year ahead forecast was constructed through econometric modelling. Thirdly, the profitability of ECA abatement strategies and their sensitivity to different oil price scenarios was evaluated. Lastly, the impact of ECO ship design, the EEDI, and fuel-efficient design on the investment were assessed. The thesis concludes that key factors that drive the profitability of a product tanker investment have not changed. Freight rates have the largest impact of profitability, and the effects of newbuilding prices can be crucial through the dynamics of timing of investments. However, more stringent regulations in the shipping industry have made ship design issues more important for the investment decision. The optimal choice of abatement technology in complying with ECA regulations is highly sensitive to oil price volatilities. The results of the crude oil forecast exhibited increased oil price volatility, which therefore also implies more vigorous effects on relative design profitability. Findings also show that the optimal choice of abatement strategy is highly sensitive to the amount of time spent within an ECA. These dynamics are argued to be transferable to the enforcement of a global sulphur cap. The decision by the IMO to implement targets in 2020 instead of 2025 would imply a larger fraction of the vessel’s commercial life sailing under a 0.5 per cent sulphur limit. Consequently, the uncertainty of when the global sulphur cap will be enforced implies a high degree of uncertainty for the profitability of the ship owner’s investment. This implies that ship owners are faced with larger uncertainties in 2015 and going forward than prior to 2006.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2015
Number of pages132