New VLCCs move Asian gasoil to Europe, Africa as road transport recovers
An increase in road transport in Europe and Africa amid a slight easing of coronavirus-linked lockdowns has significantly increased East to West flows of gasoil, and close to half a dozen newbuild VLCCs have been chartered with such options, market participants in Asia said March 16.
They said companies such as Trafigura, Glencore’s shipping arm ST and BP are taking VLCCs on short time charter of up to 90 days with options to either store or move gasoil.
While these companies could not be reached directly for comment, a broker said that more than half a dozen LR2s have been chartered with options to load gasoil later in March for delivery into Europe and a similar number of VLCCs have also been taken with storage and delivery options.
Another broker confirmed the trend and said one such new VLCC, the Diodorus, was taking gasoil to Europe via the Cape of Good Hope on behalf of Glencore. Trafigura has also chartered two new VLCCs with similar storage and delivery options, shipping executives and trading sources said.
Traders said they welcomed the outflow of gasoil from Asia as it will provide much-needed relief from the supply overhang.
“Supply from China, India and the Middle East has been pressuring down the market,” a Northeast Asian refiner source said. Other trade sources expressed similar sentiments, saying the surplus gasoil barrels had to be diverted out of the region to prevent a stubborn supply overhang.
“I think [the Asian] gasoil [market] would be supported by these VLCCs [moving barrels out of the region],” a regional trader said.
New VLCCs constructed in Asian shipyards can take larger volumes of gasoil up to 270,000 mt each, compared with 90,000 mt each on LR2s. This provides economies of scale for traders and VLCCs owners to offer relatively discounted freight, as their supertankers would otherwise have to ballast to the Middle East or West Africa to pick up their maiden cargoes of crude or fuel oil.
One of the VLCCs, the Dhalkut, is still in the Singapore area, sources said. It is under short time charter of up to three months with Glencore’s shipping arm ST, a VLCC broker said. “It is not clear where it will take the gasoil, Europe or Africa, and when,” a source familiar with the matter said.
Another VLCC, the Yuan Peng Yang, is with BP for a two-month short-time charter and was still in Singapore, the same broker said.
Asian gasoil supply has been healthy in March, with the strong Exchange of Swaps spread seen earlier in the month spurring gasoil outflows from India and the Persian Gulf.
China’s gasoil exports were widely expected to hit an 11-month high of 2.29 million mt in March, with some market participants forecasting exports to be as high as 2.6 million mt.
The EFS, or spread between Singapore 10 ppm sulfur gasoil swaps and the corresponding ICE low sulfur gasoil futures, is an arbitrage barometer for the movement of gasoil barrels from the East of Suez to Europe. A wider negative EFS spread shows that gasoil can command a higher price in the West than in Asia, and current levels are seen too high for viable arbitrage economics to work. Traders typically deem the arbitrage economics are generally workable when the spread widens to minus $10/-minus $15/mt.
At 0300 GMT March 16, the EFS spread was at an intraday value of minus $3.50/mt, largely steady from the minus $3.76/mt assessed at the Asian close March 15.
“Different companies have different arb econs ….. so it is hard to say,” a trader based in Singapore said when asked if the economics were viable for cross-regional flows at the current EFS spread.
The latest spurt in gasoil deliveries from Asia to Europe on new VLCCs is more likely the result of reduced transportation costs from substituting the use of LRs for spot cargo deliveries, sources said.
Oil traders noted that any time newbuild VLCCs typically had to head West for delivery, their freight was discounted to acquire certain certifications — and this provides charterers not only with a more economical option but also an opportunity to move a larger-than-usual volumes of clean products, such as gasoil.