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Traders split naphtha cargoes onto MRs to capitalize on weaker freight

The sharp fall in Medium Range, or MR, tanker rates to an all-time low along with a sizable discount to Long Range, or LR tankers has prompted several charterers to either split cargoes or directly move smaller parcels from the Middle East and India to North Asia, several market participants said.

Naphtha traders are making significant savings on freight to competitively bid for Free on Board, or FOB cargoes from the Middle East and India, they said.

Not to miss an opportunity, several companies such as BP, Emirates National Oil Company, Shell, Socar and Vitol have chartered MRs to move naphtha into North Asia, participants in Seoul, Singapore, Tokyo and UAE said.

Recently, a freight window for a small duration opened for the trading companies when the MR rates slumped into uncharted territory, making them much cheaper than the LRs.

“There are more than 100 MRs expected to be available in the Persian Gulf until early August and this prompted owners to provide their ships at any rate offered to them,” said a shipping broker in Singapore.

Around 10 days ago, the MRs were available at a 15-20 Worldscale points discount to the LR2s and LR1s, according to the S&P Global Platts data. Typically it is the other way round as bigger ships enjoy the economies of scale.

However, after OPEC and other oil exporting countries reduced crude output, the refineries have also cut processing in line with their estimates for lesser consumption of products such as naphtha amid the COVID-19 pandemic.

As a natural consequence, scores of ships are unemployed and willing to give hefty discounts to those prepared to charter them, sources said.

“Owners are just accepting the first counter [bid],” said an MR broker in England.

To take take advantage of cost benefits, a substantial portion of the term contracts to supply naphtha in North Asia is traditionally moved on the LR tankers.

However, in early July, based on the basket of load and discharge ports used by Platts for its tanker assessments, it was almost $4/mt and $5/mt cheaper to load cargoes in MRs compared with LR2s and LR1s. For the key PG-Japan voyage, LR2 freight was last assessed at W63 ($17.36/mt), LR1 at w58 ($16.74/mt) and MR at w57.50 ($14.47/mt), Platts data showed.

The LR2s, LR1s and MRs typically move cargoes of around 75,000 mt, 55,000 mt and 35,000 mt naphtha.

The decline in rates has also reduced the cost of transportation for the trading companies moving naphtha into North Asia, giving room to traders to be more aggressive with cargo premiums, sources said.

Just over a week ago, Indian Oil Corp. awarded a 35,000 mt naphtha tender cargo, for July 20-22 Chennai loading to Socar at a $40/mt premium to the average of Platts and Argus Arab Gulf naphtha assessments, FOB, a source familiar with the matter said.

In recent FOB tenders in the Persian Gulf, UAE’s Abu Dhabi National Oil Company and Qatar’s QPSPP have both sold naphtha cargoes for July 29-30 loading at premiums between $28-$30/mt, sources said. Bahrain’s Bapco sold naphtha loading August 16-19 at a premium of $28-$29/mt, they said. In comparison, Bapco last sold naphtha August 1-4 loading at a premium in the low $20s/mt, they added.

Cash differentials for spot paraffinic naphtha parcels was assessed at plus $26.50/mt on July 13, down $1.50/mt day on day, against the key Mean of Platts Arab Gulf naphtha physical, on an FOB basis, Platts data showed. The cash differential had risen to a near five-month high of $30/mt on July 6, a level last seen on February 14, according to the data.

Due to these flurry of tender deals, there is slightly more demand for MRs, but ample supply means that it is still not sufficient to support the rates.

On the contrary, freight on the LRs have decreased along with freight for the MR segment to more attractive levels to charterers.

“There are still a lot of ships and not many cargoes,” said a source with one of the MR owners.

“The LRs have weakened too, so [splitting cargoes into MRs] might stop happening,” another MR source said.

A naphtha trader in Singapore concurred and pointed out that the freight market adjusts quickly and there may not always be an opportunity to split cargoes, as was the case recently. One example is Shell, which had split an LR cargo onto two MRs, Hellas Revenger and Oak Express, both loading July 11 for PG-Japan voyages, fixed at w55 each, sources said.

Chartering executives and shipping brokers in Singapore, Seoul and Tokyo estimate close to a 100 LR1s available for loading in East of Suez over the next four weeks.

This is now expected to provide naphtha traders a chance to move cheaper cargoes at lower freight rates on bigger ships as well.
Source: Platts

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