Uncertainty to dominate in West of Suez clean tankers markets in 2022
A dismal year for clean tanker earnings over most of 2021 ended with some improvement across a number of vessel classes in the fourth quarter, but developments in the coronavirus pandemic, along with the emergence of new refining hubs worldwide, means the direction of travel remains uncertain in 2022.
Under pressure from record high bunker prices, larger vessels cannibalizing smaller vessel cargo inquiries, and a lack of sustained arbitrage opportunities in key basins, the first half of the third quarter saw clean tankers generating negative returns on familiar trade routes, keeping shipowner options to a minimum amid weaker sentiment across all markets.
However, more supportive elements materialized in the second half of Q3 and Q4, leading to multi-month highs in all markets. Mediterranean Handysize markets experiencing rises not witnessed since the freight spike in April 2020 at the start of the pandemic as particularly harsh seasonal conditions coincided with charterers pushing for multiple inquiries in a short space of time. Adverse weather also supported markets in the North, with freight indications for UK Continent-US Atlantic Coast Medium Range tanker rates hitting a yearly high in mid-December.
Long Range tanker markets were boosted by a flurry of distillate shipments from East of Suez markets to Europe — predominantly jet — allowing shipowners to undertake ballast to the East for more attractive prospects. Eastern markets identified Q3 jet demand growing in the West due to lockdown restrictions easing in comparison to the Asia-Pacific, allowing for the high volume of trade to take place.
With some improvement in Q4, the scene was set to avoid a repetition of the bleak Q1 in 2021 due to pandemic-related lockdown restrictions in European markets, but uncertainties lie ahead for West of Suez clean tanker markets this year.
The emergence of the omicron variant has cast into doubt that oil demand will return to pre-pandemic levels, although some suggest the global economy has become more resilient and demand will hold up.
The International Energy Agency and OPEC expect oil demand to exceed the 100 million b/d mark in the summer of 2022. Meanwhile, S&P Global Platts Analytics expects global oil demand to grow by 4.6 million-4.8 million b/d in 2022, or just short of 5%, to average 103 million b/d. At that level, total demand will surpass pre-pandemic levels by some 600,000-800,000 b/d in 2022.
However, high refinery feedstock prices for products such as natural gas are likely to crank up the pressure on refineries, leaving potentially less product for ships to carry due to poor margins. Mediterranean refiners in particular were left particularly exposed to record highs of European natural gas and carbon prices, leading to refinery run cuts in late October 2021.
Should feedstock prices continue to crimp refinery margins in 2022, the prospect of run cuts in the Mediterranean leaves them exposed as a key hub for ballasters from West Africa, Brazil and Northwest Europe. Platts Analytics expects a higher potential for run cuts for Med refiners that are “unable to hedge exposure to high natural gas prices” while runs in Northwest Europe are expected to improve in Q1 2022 on 2021 but will remain below 2019.
New refinery capacity
The completion of new refining capacity across the globe could also complicate a number of key markets in the region.
The long-awaited 650,000 b/d Dangote refinery in Nigeria is reportedly on track for an early 2022 start-up. Some market participants have said this could spell the beginning of the end for European exports of gasoline to West Africa, for both MRs and LRs, as the region would become vertically integrated and self sufficient in refined products distribution.
Others, however, think the refinery could be a competitor in global trade flows, potentially supplying exports to Brazil — where many ship-to-ship transfers occurred in 2021 — or even gasoline exports to the US challenging the European status quo.
Meanwhile Kuwait National Petroleum Company completed the Clean Fuels project at its Mina al-Ahmadi and Mina Abdullah refineries in 2021, which will increase their overall capacity and “open new markets.” Should more options become readily available in Eastern circuits, shipowners could look to recalibrate their positioning in the year ahead.
A starvation of long-haul options was seen as one of the primary reasons for tanker cannibalization in large parts of 2021 as larger vessels took on short-haul routes at more attractive rates for charterers. Should ton-mile demand ease as a result of new conduits in markets away from the West, particularly with more refining capacity developing in the East, pressure could be observed in more Western markets.
The likes of renewable product expansion and emissions trading scheme regulations will only continue to grow, offering food for thought to shipowners in West of Suez markets.