The Beginning of the End

The Beginning of the End

Last week we titled our report “White House in the Spotlight… Again” and we could just as well use the same headline again this week, with the tanker market outlook very much influenced by decisions made in the US and Moscow. This week, Trump announced that he and President Putin had spoken at length, the first confirmed direct contact between a Russian and US president since 2022. The agenda was of course focused on ending the war in Ukraine. For the first time since the conflict began, it appears there will now be a push for peace. How long this might take, and what that might look like remains unclear, but given how impactful the war has been for the tanker market, it is arguably the most critical factor impacting the medium-term outlook.

Historical demand impact

Tanker tonne miles (crude/DPP/CPP) grew 5.5% in 2022 following the invasion and by 7.3% in 2023 after the implementation of the European/US embargo on Russian oil and oil price cap framework. Whilst not all of this growth was attributable to the war, the majority was, particularly in 2023.

European reaction

It remains heavily debated whether or not trade flows might return to “normal” in the event of a peace deal. The current leaders of the UK, France, and Germany, as well as the Baltic and other EU States might try particularly hard to prevent a swing back to Russian energy trade, especially in the event of a “bad deal” for Ukraine. Yet with the US defense secretary effectively ruling out Russia giving up all its territorial gains, as well as Ukraine joining NATO, concessions appear to already be on the table.

If it is assumed that any deal is likely to involve sanctions relief, then some normalization in trade flows are possible. The key, however, would be whether or not European refiners are allowed to return to Russian crude supplies. If this were to be the case, then over time trade flows might shift to resemble something similar (but not the same) as their prewar patterns. This year European refining throughput will be 500kbd lower than in 2022, whilst closures in Germany are likely to offer reduced scope for Russian pipeline flows to return to previous levels. Equally, other producers (notably the US) have captured market share in Europe and will need to be displaced.

For the products market, the impact could be arguably more significant than for the crude sector. CPP tanker tonne miles surged as Europe scrambled to replace Russian supplies in 2023 with cargoes from the Middle East, India, Far East and United States. At the same time, Russian cargoes which typically traded into Europe were pushed to new markets in Latin America, Africa and Asia creating substantial inefficiencies to the benefit of tanker owners and traders. Refining margins in Europe (and worldwide) also benefitted initially and would likely come under pressure if Russian supplies return to Europe. As a result, not only could we see lower domestic refining activity in Europe, but also lower long haul imports. Refiners in the US, who have lost some market share into the Americas might gain that back, but the overall impact would still be significantly lower tonne miles.

More competition in the crude market for Indian and Chinese refiners?

If sanctions are lifted, Indian and Chinese crude buyers will see more competition for Russian oil and, depending on willingness from Europe to resume Russian imports, could be incentivized to increase intake from elsewhere (likely West Africa, the Americas and Middle East) depending on prices and refining margins for specific grades.

Impact on tanker sizes

For crude tankers Aframaxes, followed by Suezmaxes were the greatest beneficiaries of the conflict, whilst VLCCs lost market share. As major VLCC destinations, India and China might have preferred to continue to use larger tankers, but given Russian port restrictions, were required to switch to Aframax and Suezmax tonnage. Thus, any increase in Indian or Chinese buying from outside Russia, is likely to benefit VLCCs more than other sizes, given the cargoes are likely to originate in West Africa, the Americas or the Middle East – key VLCC markets.

For clean tankers, LR2s and MRs saw the strongest gains in tonne miles as the refined products price cap came into effect. MRs may see less downside from reverting trade flows, given they could be redeployed on Russian exports to Europe, whilst MRs in the US Gulf would also gain back some market share in Latin America. However, for LR2s it is difficult to find a positive outlook. Europe’s imports from East of Suez would also decline, with LR2s feeling the brunt of this.

Impact on the dark fleet

However, a return to a “new normal” is not entirely negative. Since 2022, the dark/grey/illicit fleet has grown to over 1100 ships, more than 40% of which are now sanctioned. More than 90% are over 15 years of age and critically, more than 60% are over 20 years old. It’s important to note that many of these are engaged in Iranian or Venezuelan trade, so will not be impacted by a potential lifting of Russian sanctions but clearly it indicates that it will be very difficult for the >20 year old ships in particular, to continue trading. The hedge therefore for mainstream shipowners, is that whilst they may see tonne mile demand fall, any mainstream player returning to Russian trade is unlikely to use >20 year old tonnage with a checkered trading history.

In the Handy sector, where the fleet has rapidly aged, any increase in demand for sub 20 year old ships might prove problematic given many were sold off to serve trade outside the oil price cap framework. As such MRs may pick up extra demand here.

Ice class ships

Likewise, for both crude and clean tankers, the availability of ice class tonnage could prove problematic given the lack of investment, ageing of the fleet and trading history of these ships in recent years.

Asset prices and second hand market

The sale and purchase market could also be heavily impacted. Asset prices for newbuild and secondhand ships surged following the invasion. 15 year old prices for Suezmaxes are up 114% compared to February 2022, whilst Aframaxes gained 94%. VLCCs were up “just” 54% over the period, clearly demonstrating the preference for smaller crude carriers. If sanctions against Russia are lifted, demand for older ships is likely to come under pressure, perhaps bringing prices close enough to scrap levels. With a 20 year Aframax currently valued around $25m, compared to $8m for scrap, demolition activity is limited. However, the lifting of sanctions could significantly narrow the gap over time, making large scale scrapping a real possibility. Scrap prices are currently the lowest since 2021, but could come under pressure if an increase in scrapping is not met but an increase in demand for scrap steel.

Conclusion

Whilst negotiations appear to now be somewhat inevitable, a successful conclusion acceptable to the US, Russia, Ukraine and the Europeans is some way off. It is impossible at this stage to determine what the final settlement might look like, and most importantly, what Europe’s policy towards Russia and its energy exports might be. But, for the first time since the War began, it feels like we may be at the beginning of the end of the conflict, with fundamental changes in tanker trade an inevitable consequence.

Russian Export Tonne Mile Demand

Crude Oil

East

A quiet start to the week in the AG for VLCCs, as the expectation was to see charterers move on end decade stems due to the cargo counts being below the monthly averages, but the conclusion was that more deals were done under the radar. As we progressed through the week a few charterers stepped out of end decade and then some started to approach tonnage for first decade march. A few deals were concluded at positive levels and with sentiment now growing firmer the expectation is that next done will see a further tick up. As we look ahead to next week owners will hope the week starts off with a steady rate of enquiry with the hope of momentum building here. Today we are calling AG/China WS59 and AG/USG WS34.

Suezmaxes in the AG market have remained fairly steady this week, where the larger VLCC’s have firmed giving Suezmax owners some confidence, however with limited enquiry rates have not followed their larger cousins yet. In fact, we have seen less than last done put on subjects on a XDD unit. Looking ahead sentiment here remains steady for now as local stems have continued to turn over the top of the tonnage list steadily. 

Continuing the trend, the Aframaxes in the AG have been flat this week as the lack of activity is countered by a tight tonnage list allowing owners to maintain a moderate rate of 80 x WS145 for a TD8 run. In Asia, activity has spurred owner’s sentiment with tonnage taken off the list but the TD14 remained flat with a Australia bound run concluding at market levels. This shows resistance from owners as the scales remain balanced moving into next week.

West Africa

After last week’s disappointing spell, VLCC owners were hoping for a turnaround in WAF but that wasn’t to be as Monday and Tuesday were quiet. As we progressed through the week however things started to turn around with a few charterers stepping out with second decade cargos. Levels have started to improve with the help of activity taking place in the surrounding regions and a couple of charterers stepping out on top of each other. Sentiment in the region has grown stronger and the expectation is for the upward trend to continue. Today we are calling WAF/East in the region of WS63.

The Suezmax market in West Africa has seen a little bit of a springboard effect this week, where the week started with a slightly weaker feel to it and now at the time of writing this does seem to be more in owner’s favour. However, with little enquiry for a natural TD20 run being marketed there is still a question as to where this run really sits. For now, the natural window is generally balanced on tonnage availability so with all told we need more enquiry early next week to sustain owner’s ideas.

Mediterranean

Suezmaxes in the Med have been the talking point for many this week, with talk of the elevated CPC program for March really showing through. This is going to need to have a very close eye kept on it as many charterers are looking for East options on these stems. If confirmed, then we may see several units heading away from the region leaving tonnage replenishment weaker than we have seen of late. We close this week out with fixing levels trading firm over WS115 levels for Med discharge now and far east hovering around the $6.55m mark, sentiment remains firm and may well push on next week.

Successive weeks of gains have Aframax owners in higher spirits, as activity again allowed owners to push for increments between deals.  The week started with a busy Monday with charterers feeling they had to jump into the market off forward dates to book any reasonable levels before normal dates worked. This of course added fuel to the fire and XMed rose from 137.5 level to 147.5 and then even 165 was concluded for some shorter voyages. Eventually the shine was taken off when Suezmaxes made sense for pro-rated Aframax numbers and natural sized North Sea ballasters also gobbled up Med stems. By the close rates had begun to regress on the back of slim activity and a meagre CPC program for Aframaxes. Suezmaxes are rallying though given their busy program and so at least they are not in the picture now to erode any further Aframax strength going forward.

US Gulf/Latin America

A slow start to the week in the USG with no fresh enquiry. Sentiment remained weaker following on from last week and owners would have hoped to see some activity with a potential turnaround on the cards. It was not all doom and gloom as mid-way through the week a few under the radar deals were reported. Levels haven’t shot back up to previous highs but perhaps a steady increase will be better in the long run. The Brazil export region has been active this week with a handful of deals being done off second decade March dates. Levels have gradually improved providing positive sentiment and now the tonnage list is thinning, owners will hope to see some more charterers step out with the expectation that next done will be in an upwards direction. Today we are calling USG/China $8.40m & Brazil/China WS62.

Aframaxes seemed poised to rise, a bit on the back of strength in Vancouver and also Suezmaxes firming locally due to CPC deals today. Minimal reported activity but likely 70 x WS140 should be how next week starts off.

North Sea

Another week with surrounding markets taking the credit whilst things just tick along in the North. We have seen a fair few prompt ships snap up cargoes from the Med and others still head TA as ever. Levels still sit flat at WS107.5. The winter months are drawing to an end and yet we really haven’t had anything of a winter market with none expected.

Crude Tanker Spot Rates (WS)

Clean Products

East

A busier week in general on LRs but progress is only slow for now. LR1s have seen gentle improvement in short hauls with $125k added to AG/RSea runs whilst XAG runs are also up a notch. 55kt AG/Japan is up to WS130, a rise of around 10 points and 60kt Jet AG/UKC is up around $250k to $2.75 million. Cargoes are still slow in coming forward though with Westbound still very quiet. LR2s are also seeing decent improvements with the headline TC1 rate hitting WS125 this week with more expected. West runs also should see more movement but need to be tested. Either way rates are around $3.7 million for now and a bit more activity will push it nearer $4.0 million quickly again.

MRs East of Suez have seen a steady week of activity which has managed to keep availability in the natural window ticking over, with owners seeing opportunity to push on levels where the early window tightened. TC17 has been the main driver and we close the week with close to end month dates being quoted and WS190 repeated. East has been active as far as Singapore discharge with a full TC12 run due a fresh test and westbound sits at $2.1m level.

UK Continent

A tale of 2 halves here for the UKC MRs as Monday to Wednesday saw a steady decline in TC2 rates with owners under pressure with limited quoted stems. We slipped to 37 x WS115 but this sparked a flurry of stems and once some of the quiet deals also showed, the top of our tonnage list looked very different. Come Friday we see a number of stems still needing coverage and owners dragging their heels on commitment with last done at 37 x WS125 but owners will be hoping next done will certainly be above that. WAF has been quiet in general, and the premium tempts owners but the real fixing option has been short XUKC stems. Rates here slip below the handy levels giving a few a good chance to kill some time in hope of improvements ahead. 

The handy list for most of the week has been difficult to navigate as there has been a lack of supply on the front end of the tonnage list. Although there has been limited demand as charterers have upsized stems to MRs as they have been the cheaper alternative and resistance from handy owners to drop to pro-rated handy levels. By the end of the week, we have finally seen TC23 corrected down to 30 x WS165 and with MRs having a strong finish, Handies are now back in play for short-haul business. 

Med 

It was a tough start to the week for the Handy owners here in the Mediterranean with a build-up of tonnage over the weekend seeing rates come under pressure from the off. 30 x WS200 was the call but by midweek we reached a new low of 30 x WS162.5. BSea/Med negatively corrected off the back of this with last done currently at the 30 x WS195 mark. Fast-forward to the present and the list has started to tighten up again, especially for Naphtha suitable ships, after a busier back end of the week. A handful of cargoes remain outstanding as we approach the weekend with a feeling of potential in the air. 

Finally, to the Med MR market which has been a real mixed bag this week. Med/TA began the week around the 37 x WS160 mark with WAF tracking at a 20-point premium but since then levels have been very much cargo dependent. The equivalent of 37 x WS115 was achieved for Sines/TA but with the list tight for Naphtha tonnage we also saw 37 x WS155 go on subs. Heading into the weekend there is little left to cover Med wise but with TC2 improving owners will be feeling positive come Monday morning.

Clean Tanker Spot Rates (WS)

Dirty Products

Handy

It has been another week with little to get excited about in the North as enquiry has struggled to surface throughout. Most of the cargoes seen this week have been covered by charterers on relets leaving some owners to accumulate idle days. The last done levels sit at the equivalent of XUKC 30 x WS160. Owners will be encouraged by bad weather expected WMed early into next week and the strong performance of the Med which should see WMed positions prefer to stay local rather than look to UKC loads. However, the lack of enquiry keeps levels under pressure.

The Med has seen the opposite to the North this week with enquiry continuing to chip away at an already tight list. The week started with levels at 30 x WS150 for XMed vanilla runs, before quickly firming upon each test up to a reported 30 x WS190 on subs. However, there is some disconnect between parties here on where true levels lie leaving a well-publicised test required early next week. Bad weather WMed early into the week and bad weather EMed towards the end of it could cause some delays and benefit owners who are eager to capitalise. 

MR

Much like the Handies, MR owners in the north have seen little action with just the one deal reported for 40 x WS125 pro-rating down at 45 x WS111 in line with last done. Although MR tonnage is thinner, a lack of demand keeps a ceiling on owners’ ambitions. Looking ahead to next week, we expect last done to be repeated all things being equal.

Prospects look better for owners in the Med as the list is tight for well-approved ships and tonnage is shared amongst a few owners increasing owners’ bargaining power here. Last done sits at 45 x WS125 for XMed runs and we expect owners to kick levels on upon next test towards the 45 x WS130 mark. 

Panamax

Availability of workable tonnage on this side of the pond is very thin, to say the least, leaving charterers with few options but to seek alternatively sized vessels for the time being. Over in the USG under-the-radar activity clips units away off-market but levels here stay flat at 50 x WS120. For sentiment to improve here owners will need local Aframax markets to run.

Dirty Product Tanker Spot Rates (WS)

Rates & Bunkers

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

	wk on wk change	Feb 13th	Feb 6th	Last Month*	FFA Q4
TD3C VLCC AG-China WS	-8	59	68	54	63
TD3C VLCC AG-China TCE $/day	-10,750	38,250	49,000	31,250	37,750
TD20 Suezmax WAF-UKC WS	-6	89	94	77	88
TD20 Suezmax WAF-UKC TCE $/day	-3,500	32,000	35,500	24,000	29,000
TD25 Aframax USG-UKC WS	-4	129	133	115	138
TD25 Aframax USG-UKC TCE $/day	-1,500	26,250	27,750	21,250	25,500
TC1 LR2 AG-Japan WS	23	126	102	140
TC1 LR2 AG-Japan TCE $/day	7,750	26,000	18,250	31,000
TC18 MR USG-Brazil WS	-16	146	162	166	176
TC18 MR USG-Brazil TCE $/day	-2,750	14,500	17,250	17,750	18,000
TC5 LR1 AG-Japan WS	9	130	121	139	138
TC5 LR1 AG-Japan TCE $/day	2,000	17,250	15,250	19,250	17,250
TC7 MR Singapore-EC Aus WS	5	175	171	174	173
TC7 MR Singapore-EC Aus TCE $/day	500	17,000	16,500	16,750	15,750

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

Bunker Prices ($/tonne)

	wk on wk change	Feb 13th	Feb 6th	Last Month*
Rotterdam VLSFO	+4	543	539	542
Fujairah VLSFO	+2	560	558	580
Singapore VLSFO	+1	568	567	598
Rotterdam LSMGO	+7	659	652	700

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