USGC Aframax market welcomes ballasters to reopen arbitrage, following 43% freight spike

The USGC Aframax market, which has seen freight for ships to Europe jump 43% since before all-time high US crude export volumes were reached in the week ending December 27, is preparing for an influx of tonnage as a number of ballasting ships from the UK-Continent and Mediterranean regions head to the Gulf of Mexico.

“There are a hoard of ballasters coming to the US Gulf Coast,” a US-based shipbroker said.

There are approximately 11 Aframaxes ballasting in to the USGC to arrive between January 12-22 according to S&P Global Platts tradeflow software cFlow.

Owners with ships positioned in Europe have been seen ballasting down to the USGC to take advantage of higher earnings.

“In the US it’s mostly down to a ship to cargo ratio very much in favor of shipowners right now,” a second shipbroker said.

Freight for the Aframax 70,000 mt USGC-UK Continent route was last assessed Tuesday at w314.25, basis Worldscale 2020 flat rates, or $64.04/mt. This is well over double the first all-time high reached on the route on October 9 at $36.60/mt. Freight has been on a steady climb upwards since December 5, when it was assessed at $30.65/mt.

Market participants have been at odds to determine tradable freight rates for the route, with negotiations very dependent on desired loading dates. Indications on the route were heard at a wide range of w300-w380, basis Worldscale 2019 flat rates, throughout the day Tuesday.

“It’s all very date dependent right now,” a third shipbroker said. “We will see [rates] start to dwindle for fixing past the January 17-19 window.”

For North Sea and Baltic Sea loadings, rates have softened continuously since the start of 2020, as the very lengthy tonnage list in the North was pressuring freight rates downwards and putting charterers in the driving seat. The cross-UK Continent 80,000 mt assessment has dropped 39% since December 18, 2019, and was last assessed at $11.24/mt basis 2020 flats.

SHIPOWNERS NOT TO WORRY
Although rates are expected to correct down to levels more doable for charterers with the ballasting ships on the way, shipowners are still looking towards favorable conditions in both regions.

With higher rates in the USGC, bearish sentiment in Europe is expected to turn around with the amount of tankers heading to the US looking to benefit from the sky-high rates and in turn creating a shortage of tonnage in the North Sea and Baltic regions, market participants in both regions said.

Increased demand for US-origin crudes, specifically light sweet crudes out of the region, is providing the largest boost to rates with the need pressing for low-sulfur bunker fuel now that IMO 2020 regulations are in play.

US crude exports reached 4.462 million b/d in the week ending December 27, US Energy Information Administration data showed Friday, up 1.065 million b/d from the week prior. This weekly number was the highest volume of exports since the US lifted its ban on crude exports in December 2015.

Yet crude export volumes appear to have come under pressure recently, as steeply rising freight closed the arbitrage from the USGC to Europe, producing negative refining margins for WTI MEH (Magellan East Houston terminal), according to Platts Analytics. The Platts Analytics crude arbitrage calculator shows that the cost for European crude buyers to take WTI crude is $5.30/b more expensive than that of domestic grades.

But ballasters are expected to introduce downward pressure to the market, although not for long. “There’s about 30 Aframaxes on the way for second-half of January loadings,” a charterer said. “But with the increased exports, and seeing that January may be another record export month, those 30 may not be enough.”

Americas Aframax rates typically see a large seasonal boost heading into the end of the year as charterers look to cover cargoes ahead of the holiday season and to reduce stocks toward prior to year’s end for tax purposes. The busy fixing season got an early start in 2019, as charterers sought to shift last-minute cargoes ahead of the implementation date of IMO 2020.

UPCOAST FREIGHT TO HOLD?
Freight for ships making upcoast runs out of the East Coast of Mexico and the Caribbean could see less bearish pressure in comparison, market sources have said.

“There are not a lot of places to get ships for local business and the ballasters are not going to do an East Coast Mexico cargo,” a shipowner said. “They will all be looking to lock into trans-Atlantic voyages.”

The spread between the USGC-UK Continent and East Coast Mexico-USGC routes has widened, with trans-Atlantic freight moving out to 78.7% of upcoast Worldscale rates Tuesday after averaging 90.4% in December.

The cost of taking an Aframax on an East Coast Mexico-USGC run was last assessed Tuesday at w408.25, basis 2020 flats, or $20.05/mt.
Source: Platts