Cleaning Up

LRs have seen extreme volatility this year, with spot earnings looking very much like a roller coaster ride. TCE returns on benchmark LR2 and LR1 trades have climbed several times this year above $100,000/day and $60,000/day respectively. Attacks on commercial shipping in the Red Sea are a key factor behind it, with 80% of all international owners switching to Cape of Good Hope routing for delivering clean petroleum products (CPP) into the European market. Total volumes shipped from the Middle East (excl. West Coast Saudi Arabia) have also steadily increased by around 400kbd between January and May, driven by rising refining runs on the back of substantial new capacity.

With the LR tanker market booming, there has been another emerging trend of larger crude tankers cleaning up and competing in that market. One Suezmax, previously trading dirty, loaded clean products in the Middle East/WC India range in February. This was followed by two more Suezmaxes in April and another two in May. The trend has intensified this month, with five more Suezmaxes and one VLCC cleaning up and loading products in the region. There have also been unconfirmed reports of more vessels cleaning up and preparing to load CPP in the short term. And we also must not forget about existing the LR3s (plus one newbuild Suezmax), that have been trading clean even before the Red Sea disruptions started to emerge.

Another factor behind the cleaning up trend is the relatively underperforming Suezmax market compared to LRs. On benchmark round voyage trades, so far this year Suezmax TCE earnings (eco basis) have averaged $46,000/day compared to LR2 spot TCE at $53,500/day, with the delta between the two at times being as high as $60,000/day.

Whilst the latest trend is a negative development for the LRs, it is worth bearing in mind that so far this month just 7% of CPP coming out of the Middle East (excl. West Coast Saudi Arabia) has been moved on 125,000+ dwt tonnage. That 7% includes LR3s (Suezmaxes that have always traded clean). As such, it is perhaps not surprising that LR earnings remain very healthy, although of course not as high as what we have seen a few weeks ago.

Going forward, however, there are a few things to consider. The crude tanker market traditionally is at its seasonally lowest during Q3 on the back of limited crude exports from key crude exporting and refining hubs, such as the US, Middle East and Russia, with more barrels retained within domestic refining system to meet peak summer demand. At the same time, weather-related delays, a formidable factor for the northern hemisphere Suezmax and Aframax market, are also at their lowest during Q3. The temporary opening of the Northern Sea route in late summer/early autumn also leads to greater efficiencies for shipping Russian barrels into China. For the larger clean tanker market, it is the opposite: strong, travel-driven summer demand tends to peak in key product importing regions, supporting tanker trade.

A greater involvement of larger crude carriers in the product tanker market certainly has the potential to reduce the LR volatility in months ahead. However, what is more alarming, is the traditional diverging trend between the two markets in Q3. Will we see more larger crude carriers cleaning up, depressing LR returns further, or will this merely cap the potential for LRs to skyrocket as they have done in recent months?

Suezmax and LR2 Benchmark Earnings ($000/day)

Crude Oil

Middle East

VLCC rates continued on their downward trajectory as reduced demand has led to an oversupply of tonnage which is putting further pressure on Owners. The usual outlet of ballasting West is currently not enticing due to challenging conditions in the Atlantic and this is adding to the pile up of ships as Owners look at shorter voyages in order to minimize the time spent with lower TCE’s. Today we are calling a 270,000mt AG/China run at ws 49 and a 280,000mt AG/USG run is now at the ws 31 level.

The AG Suezmax market remains soft but we have seen a healthy number clipped from the list to stabilize things. For TD23 runs we estimate this at 140,000mt x ws 67.5 level via the COGH. To head East, the market remains stable and capped by the VLCCs at around ws 105 for East.

A softer week on the AG Aframaxes due to the lack of activity that comes with Eid celebrations. The natural domino effect of Suezmaxes falling under pressure by a weak VLCC market should in turn force Suezmaxes to compete for Afra stems. We now assess GG/east at 80,000mt x ws 190 with more wood to chop.

West Africa

The WAF VLCC market experienced another challenging week with limited opportunities for Owners to find suitable employment. Volumes going Eastbound remained low so it was mainly voyages into Europe that kept us occupied, albeit at a slow pace. It is hard to see a recovery here in the short term with both US and AG markets in decline. In today’s market we estimate that the current rate for WAF/China should be around the ws 55 level.

Suezmax markets in West Africa remain stable. For TD20 today, Charterers will be aiming around 130,000mt x ws 112.5.

Mediterranean

For the Mediterranean Suezmax market, TD6 remains steady at around 135,000mt x ws 122.5. Rates to head East are steady and we feel a level of $5.5M for Libya/Ningbo via the COGH is achievable.

A mediocre week for Aframax Owners in the Med with only port disruption preventing more serious rate erosion. Activity levels have been uninspiring which gave owners some disquiet and Ceyhan voyage rates drifted down from low ws 150s to mid ws 140s. CPC cargos suffered a similar fate with rates dropping from the high ws 160s to the low ws 160s, but the situation could have been more dire still were it not for certain Mediterranean players clinging onto ships for longer than expected. Into the next days there is likely to be more of the same to come, with a healthy amount of ships still available for end/early dates and surrounding markets not providing much reason for cheer

US Gulf/Latin America

The normally buoyant USG export market has joined the adjacent markets as freight rates have slumped to levels approaching yearly lows. The long East voyages are noticeably few and far between so most of the activity is centered on shorter voyages to Europe which is having a negative effect on the tonne mile ratio. Brazil exports also suffered a lackluster week with rates dropping in a similar pattern to other zones. We expect a USG/China run will fix in the region of $7.9M while we estimate a Brazil/China run is paying around the ws 53.5 level.

North Sea

The NSea has traded relatively laterally throughout the week with little excitement. The ebb and flow of the US market has attracted a few ballasters as usual but with the Med market looking weak there is little draw for more conventional players to leave the region for the time being. Rates are trading circa ws 170, we see the market flat for now to close the week.

Crude Tanker Spot Rates (WS)

Clean Products

East

A slower week all round for the LRs, and as such have seen rates negatively adjust slightly as the week has progressed. TC1 is down to 75,000mt x ws 197.5 but we assess that there could still be more to come. ex AG for West has also come off to $6.0M as the lack of activity took hold. The LR1s have been a little busier on the short haul cargos and have done well to clear several units off the front end. However, tonnage remains and the pressure from the larger ships will undoubtedly squeeze this segment. TC5 is at the 55,000mt x ws 235-240 levels and AG/West at $4.5M. Owners will be hoping that the taps are turned on early next week otherwise it could be a slow end to the month.

The AG MRs are stable, quiet on the surface, but enough going on off market to stop them tanking. The large volume of distillate going on clean ups, combined with lots of D/R options on current fixtures is the main driving force behind market ‘quietness’ publicly. Looking into next week, the position list is tight for good itineraries for the rest of June, and we have barely seen July dates quoted yet, so a slight bullish undertone to finish week 25.

Mediterranean

It’s been a tough week for Handy owners down in the Mediterranean with rates under pressure throughout. We began the week with XMed trading at 30,000mt x ws 175 but with prompt tonnage in abundance and fresh enquiry lacking, levels soon took a hit. Fast-forward to Friday and we see rates trading at the 30,000mt x ws 145 mark with the BSea in need of a fresh negative test. One positive is that enquiry has started to pick up a touch more which should help to clear the littered tonnage on the front-end.

Finally to the Med MR’s where for the first time in a while we have seen rates trading at lower levels than its UKC counterpart. 37,000mt x ws 160 was the call for Med/TA on Monday morning but with slow enquiry we soon saw rates slip. 37,000mt x ws 150 is now on subs for Med/TA for an ex DD ship with WAF at 37,000mt x ws 167.5. At the time of writing there’s little left to cover so expect a quiet finish to the week.

UK Continent 

There is little to write about on Handys in the UKC with the market looking weak. MR’s have been taking some short runs out the game for most Handy owners and as a result it’s been a quiet week with rates lingering at ws 165 for the majority. Quiet into the weekend.

An unfortunate week for Owners with TC2 slowly coming off from ws 160-165 to ws 150 levels as cargoes were drip fed throughout the week and the build up of tonnage gave Charterers all the ammunition needed to put pressure on rates. Even though there’s been some under the radar fixing and the TC2 arb working for a day then closing it all seems to be in Charterers favour heading into next week.

Clean Tanker Spot Rates (WS)

Dirty Products

Handy

In the North, the week kicked off in a sluggish fashion with little activity to report and few outstanding cargoes causing units to slowly populate the list. Sentiment had changed from firm to steady at ws 295. Cargoes arrived in the market on Wednesday, clearing the more prompt units and shifting sentiment back to firm with Owners sure of further firming levels by the week’s end. These views were realized the next day as ws 297.5 was reported on subs. Looking ahead, Owners will be hoping for enquiry to stay if levels are to kick on further.

It’s a different story in The Med where a lengthier-looking list was being added to by the day, enquiry was scarce and levels softened. Sluggish activity continued throughout the week causing rates to fall from ws 285 down to ws 275 by the close of the week’s session. Levels are yet to find a floor and with further replenishment of tonnage expected, continued softening is to be expected.

MR

The well-publicised test of levels finally arrived this week with ws 210 fixed, bringing a new benchmark that Owners can look to build on. Naturally positioned MR tonnage is scarce with WMed ballasters making up the majority of tonnage for another week running. Given the softness of the Med, Owners are more willing to ballast to meet demand in The North for full stem and part cargoes, bringing some reprieve and leaving sentiment steady at ws 210.

The Med has seen the better part of full stem activity once again this week, although rates are on a downward trend. MRs show availability throughout the list and begin to bunch up towards the end of the decade. Levels started the week at ws 200 before quickly softening to ws 197.5. Owners have continued to find employment via part cargoes keeping over abundance of units at bay. Looking to next week we expect more of the same with levels to continue being tested.

Panamax

A quiet week again for Panamaxes with just one fixture to report for a UKC-Med run with rates settling at a well-expected ws 140 level. It’s worth noting however that because of fundamental liquidity problems with this sector, when the Afras spiked, the Panamaxes failed to register a test. So now that levels on the surrounding Afras have come off, (although anyone reading would be forgiven thinking this market should be affected), however on a pro rata basis, things stack up correctly due to the fact that the Panamaxes didn’t ever go up.

Dirty Product Tanker Spot Rates (WS)

Rates & Bunkers

Clean and Dirty Tanker Spot Market Developments – Spot WS and $/day TCE (a)

wk on wk changeJun 21stJun 13thLast Month*FFA Q2
TD3C VLCC AG-China WS-150516861
TD3C VLCC AG-China TCE $/day-2,50025,75028,25049,50033,250
TD20 Suezmax WAF-UKC WS-2112114111110
TD20 Suezmax WAF-UKC TCE $/day-2,00045,00047,00044,75039,250
TD25 Aframax USG-UKC WS-28201229158189
TD25 Aframax USG-UKC TCE $/day-11,00052,25063,25037,25043,750
TC1 LR2 AG-Japan WS+0201201270 
TC1 LR2 AG-Japan TCE $/day-50051,75052,25077,000
TC18 MR USG-Brazil WS+92305213213251
TC18 MR USG-Brazil TCE $/day+17,75044,75027,00027,00031,000
TC5 LR1 AG-Japan WS+11240229293239
TC5 LR1 AG-Japan TCE $/day+2,25045,25043,00059,75042,250
TC7 MR Singapore-EC Aus WS-11308319310305
TC7 MR Singapore-EC Aus TCE $/day-2,50040,25042,75041,00036,500

(a) based on round voyage economics at ‘market’ speed, eco, non-scrubber basis

Bunker Prices ($/tonne)

wk on wk changeJun 21stJun 13thLast Month*
Rotterdam VLSFO  +19562543550
Fujairah VLSFO  +15610595594
Singapore VLSFO  +19612593596
Rotterdam LSMGO  +37768731738

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