Crude Tankers Entering the Clean Trade Could Have Significant Impact

The product tanker market seems to be in a divergence path with the crude tanker market, after a period of high volatility. In its latest weekly report, shipbroker Gibson said that “LRs have seen extreme volatility this year, with spot earnings looking very much like a roller coaster ride. TCE returns on benchmark LR2 and LR1 trades have climbed several times this year above $100,000/day and $60,000/day respectively. Attacks on commercial shipping in the Red Sea are a key factor behind it, with 80% of all international owners switching to Cape of Good Hope routing for delivering clean petroleum products (CPP) into the European market. Total volumes shipped from the Middle East (excl. West Coast Saudi Arabia) have also steadily increased by around 400kbd between January and May, driven by rising refining runs on the back of substantial new capacity”.

According to Gibson, “with the LR tanker market booming, there has been another emerging trend of larger crude tankers cleaning up and competing in that market. One Suezmax, previously trading dirty, loaded clean products in the Middle East/WC India range in February. This was followed by two more Suezmaxes in April and another two in May. The trend has intensified this month, with five more Suezmaxes and one VLCC cleaning up and loading products in the region. There have also been unconfirmed reports of more vessels cleaning up and preparing to load CPP in the short term. And we also must not forget about existing the LR3s (plus one newbuild Suezmax), that have been trading clean even before the Red Sea disruptions started to emerge”.

“Another factor behind the cleaning up trend is the relatively underperforming Suezmax market compared to LRs. On benchmark round voyage trades, so far this year Suezmax TCE earnings (eco basis) have averaged $46,000/day compared to LR2 spot TCE at $53,500/day, with the delta between the two at times being as high as $60,000/day. Whilst the latest trend is a negative development for the LRs, it is worth bearing in mind that so far this month just 7% of CPP coming out of the Middle East (excl. West Coast Saudi Arabia) has been moved on 125,000+ dwt tonnage. That 7% includes LR3s (Suezmaxes that have always traded clean). As such, it is perhaps not surprising that LR earnings remain very healthy, although of course not as high as what we have seen a few weeks ago”, the shipbroker said.

Gibson added that “going forward, however, there are a few things to consider. The crude tanker market traditionally is at its seasonally lowest during Q3 on the back of limited crude exports from key crude exporting and refining hubs, such as the US, Middle East and Russia, with more barrels retained within domestic refining system to meet peak summer demand. At the same time, weather-related delays, a formidable factor for the northern hemisphere Suezmax and Aframax market, are also at their lowest during Q3. The temporary opening of the Northern Sea route in late summer/early autumn also leads to greater efficiencies for shipping Russian barrels into China. For the larger clean tanker market, it is the opposite: strong, travel-driven summer demand tends to peak in key product importing regions, supporting tanker trade”.

“A greater involvement of larger crude carriers in the product tanker market certainly has the potential to reduce the LR volatility in months ahead. However, what is more alarming, is the traditional diverging trend between the two markets in Q3. Will we see more larger crude carriers cleaning up, depressing LR returns further, or will this merely cap the potential for LRs to skyrocket as they have done in recent months?”, the shipbroker concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide