MR market driving force

Apr 05 2019

During the past few weeks, MRs trading out of Europe have continued to outperform expectations.

In recent years, such volatility was typically driven by erratic buying from West Africa, or stronger demand in Latin America. Volumes destined for the US have rarely been a driver of volatility, generally ticking over at a steady and predictable pace, Gibson shipbrokers said in its weekly report.


However,a combination of both anticipated and unanticipated events has temporarily shifted the dynamic in the Atlantic product tanker market. Although US refinery maintenance season had already been factored into most forecasts, the support given by unplanned outages to the US gasoline market was not.


Crude runs in March were down 0.5 mill barrels per year-on-year, as refinery upsets significantly impacted crude runs. Recently, US refinery utilisation dropped at a time when seasonally it should be rising as maintenance programmes conclude ahead of the driving season. At the same time, US gasoline stocks fell by nearly 3 mill barrels to the lowest level seen this year.


In addition, flooding in the Midwest impacted on the production of ethanol (which makes up 10% of the US gasoline pool), whilst closures of the Houston ship channel disrupted refinery operations, causing a tighter gasoline supply/demand balance.


Combined, these factors supported US gasoline prices, incentivising traders to increase import volumes, with wider arbitrages justifying higher freight levels. Further price support has been found from the switch to more expensive summer grades, whilst gasoline demand in the US is looking stronger than anticipated, underpinning firm buying activity in a tighter market.


Short term distortions in tonnage supply have of course played a role, however, a stronger European product tanker market has attracted more vessels into the region, easing tonnage supply for the weeks ahead, which has already taken some heat of out of the market.


Another risk factor for demand for product tankers loading out of Europe is that demand for shipments to Latin America, excluding Venezuela, is likely to ease following the end of US maintenance season.


Looking forward, two opposing forces need to be considered. US refinery runs are expected to increase over the coming weeks, as maintenance programmes conclude and unplanned outages ease, increasing domestic product supply (see story above). However, whilst driving season is no longer a major driver of product tanker demand, higher import volumes are likely to emerge in line with seasonal trends.


Yet, over the past few years, this alone has not be enough to generate any meaningful volatility in freight rates. Therefore, if we are to see the current level of volatility maintained, other demand drivers, such as from West Africa or Latin America, will need to emerge.


With elections now settled in Nigeria, this is far from guaranteed, Gibson concluded.


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