What Are 'Freight Rates,' And Why Are They Rising When Oil Is Falling?
Lower oil prices and increased freight demand have triggered an uptrend for global shipping stocks over the past few days.
Frontline Ltd. (NYSE: FRO) is one of the big winners, and is up 65 percent since last Wednesday.
Although shares of the shipping company fell about 20 percent on Tuesday following the announcement of a new debt-for-equity exchange, higher freight rates paint an encouraging outlook for the macro picture.
So, What Are Freight Rates?
Put simply, freight rates are the prices charged for transporting cargo (in this case, oil cargo) from one point to another.
The rates depend principally on five factors: What is being moved, how heavy it is, how large it is, how it is being moved and where it is going.
As oil prices remain low, shippers of all kinds could continue to benefit from lower costs.
However, some other companies in the industry, like Capital Product Partners L.P. (NASDAQ: CPLP), have also reported rising rates recently, as demand continues to surge.
Why Are They Rising When Oil Is Falling?
According to a Bloomberg report, some of the increased demand for shipping seems to be coming from China, as the country stockpiles low-priced crude oil.
Based on estimates, 166 million barrels of crude oil were heading to Chinese ports as of Friday morning.
Those with money available are buying oil at low prices and getting it shipped, thus benefiting shippers enormously.
The Baltic Dry Index, which measures daily shipping rates on the Middle East to Asia route, hit record levels this week, reaching January 2010 highs.
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