Gibson Consultancy & Research said that its forecast spot rates across all tanker sectors would be lower this year on average relative to 2015, however, the scale and speed of the correction exceeded expectations.
A number of factors were at play.
For example, the supply of tonnage was rising. Thus far in 2016, we have seen around 44 MRs, 25 LR2/Aframaxes and eight LR1/Panamaxes delivered (5.5 mill dwt), with a further 10 million dwt to come this year alone, Gibson said.
It was therefore of little surprise to see rates under pressure, at least from a supply side perspective. However, the demand side was less supportive than originally anticipated.
In the West, product tankers were pressured by a lack of arbitrage business. The key Europe/US Atlantic Coast TC2 trade has suffered from high gasoline stocks along the Atlantic seaboard, making it difficult for traders to place cargoes. Equally, the backhaul US Gulf/Europe TC14 has shown few signs of strength, as diesel stocks on the Continent remained high.
Even with the recent drawdown, due to strikes in France, the arbs have been challenging to say the least, Gibson said.
LRs in the region suffered a similar fate. Far East naphtha price premiums over European narrowed to $6.25per tonne earlier this month, the lowest premium in three years, owing to a temporary oversupply of light distillates (gasoline/naphtha) in the region. The result was painfully low LR freight rates.
The arbitrage may have since improved, but still sits below workable levels.
The picture East of Suez was not much better despite some positive demand side developments. Saudi net product exports surged in the first quarter of this year, following significant downstream investment in recent years. For example, 1Q16 net exports stood at 940,000 barrels oer day, vs 440,000 barrels per day over the same period of 2015, yet the market weakened.
In addition, India both exported and imported above average volumes in the first quarter, although export capacity is likely to be pressured by strong domestic demand. Stockpiling
ahead of Ramadan failed to support freight, with Argus reporting that Turkey and India dominated gasoline exports to the Middle East during the period, reducing the demand for European barrels, whilst rising exports from North Asia also competed with flows from the West.
Competitively priced LPG also squeezed out some naphtha cargoes, whilst at the same time, European naphtha producers found it more profitable to sell to regional buyers.
However, a demand rebound may be on the cards later in the year. Demand for naphtha
in the East is expected to increase over the second half of 2016, as new petrochemical projects ramp up. Much of this additional demand will be met from new condensate splitter capacity in the Middle East, as well as increased arbitrage flows from Europe.
Furthermore, as the crude market rebalances and product stocks ease, trading opportunities are expected to increase.
Longer term, a period of weaker refining margins could once again see capacity rationalisation in ageing refining centres, increasing the need for long haul imports and with that, increased tanker demand.
Today, optimists may even take comfort from meteorologists’ predictions that the 2016 hurricane season may be the most active in years, perhaps injecting some volatility into the freight market, Gibson concluded.