Home / Shipping News / Hellenic Shipping News / Large Product Tankers are facing headwinds despite promising potential

Large Product Tankers are facing headwinds despite promising potential

The high aspirations regarding a potential success story centered around the LR (Long Range) product tanker segement, seem to be failing to live up to expectations thus far. According to the latest weekly report from shipbroker Gibson, “there has always been a compelling story being told about how larger product carriers are the future, in particular the LR2s. However, the sector has had a particularly challenging few months, with little optimism regarding a sustained recovery in earnings”.

According to Gibson, “the LR2 story centered around the expansion of refining capacity in the Middle East, capacity reductions in Europe and wider product imbalances driving long haul trade. In some regards that story delivered. Middle East refining capacity expanded and exports surged. Refineries in Europe came under pressure with some capacity being mothballed. However, the story didn’t quite deliver on its full promise. The Jazan refinery, which was originally slated for commission in 2016 is not expected to start initial runs until 2018, leaving some of the expected demand growth on the table, whilst the collapse in oil prices saw stronger global refining margins, staving off refinery closures in Europe until later in the decade. With both new and old plants competing with each other, a new and unexpected problem of product overhangs soon emerged, killing many arbitrage opportunities, particularly hurting product loadings in the West”.

Despite these issues, “the main driver behind the LR2 story (Middle East export growth) largely deliveried, supporting a period of strong LR2 earnings. However, the growth was always going to be finite as exports plateaued into 2016, whilst fleet growth started to excelerate. Clearly the initial fleet expansion was manageable. However, as is often the case, it was the extent of previous ordering activity which is being felt today. Demand growth may have taken a hit from the factors described above, but was always expected to ease relative to the past few years. On the immediate horizon with limited new capacity coming online, coupled with the headwinds currently facing the global products markets, a speedy recovery may not be on the cards”, Gibson said.

The shipbroker added that “so where will the next surge in demand come from? We’ve written at length in the past about how stocks need to come down to allow for a return to normal trading conditions. However, beyond these factors some supportive developments are starting to appear just over the horizon. Collectively Saudi Arabia, Kuwait, Oman, Iran, Iraq and the UAE plan to add over 1.5 million b/d of capacity between 2018-2021 which, will start to support export growth from the region once again. Furthermore, this will coincide with a major change in the global bunker specification and shift towards middle distillates. With more export oriented demand coming online and a tighter middle distillates market, larger product carriers could once again be in high demand to move large volumes of compliant gasoil long distances. Furthermore, if ordering activity stays within reasonable limits, and scrapping begins to accelerate driven by regulatory developments, the foundations for a more sustainable market recovery could soon be laid”.

Meanwhile, in the crude tanker this week, in the Middle East, Gibson said that “VLCC Charterers kept to a brisk pace to conclude the back end of the February programme in readiness for March allocations that should be fully in hand by late next week. Volumes were therefore sufficient to allow Owners to gently raise rates, but were not quite heavy enough for a true breakout and the cross-month interval is likely to stall further potential. Currently rates peak at ws 77.5 to the East and into the low ws 40’s West. Suezmaxes enjoyed a modest pick-up in activity, but only a slight gain in rates that edged higher to 130,000 by ws 77.5 to the East and to ws 42.5 to the West, broadly equalising with VLCC numbers – the differential will open again, but the jury is out as to which size will make the necessary move. Aframaxes trod water over the week at up to 80,000 by ws 115 to Singapore and look set to continue to operate at close to that over the next phase”, the shipbroker concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

Leave a Reply

Your email address will not be published. Required fields are marked *



Please enter the CAPTCHA text

Recent Videos

Hellenic Shipping News Worldwide Online Daily Newspaper on Hellenic and International Shipping