Bullish sentiment on Aframax/Suezmax future

May 12 2017

Europe imports a majority of its refining feedstock and provides significant support for dirty tanker trade flows by importing the majority of its refining feedstock.

As one of the world’s largest refining centres, this area requires over 12.5 mill barrels per day of crude oil to meet regional demand. Crude output levels are pegged at just over 3 mill barrels per day (excluding FSUs),

An increase in European refined product demand, coupled with lower crude pricing and higher outflows to the West, has strengthened product margins and prompted refiners to increase crude runs, McQuilling Services said in an industry note.  

Overall crude import volumes into Europe fell last year, largely due to a 168,000 barrels per day year-on-year decline in Northern European refinery runs. Towards the end of the year, European crude intake rose to over 13.0 mill barrel per day in December and averaged over 12.7 mill barrels per day level over the next two months, as product margins strengthened. 

We are currently in the midst of a seasonal decline, projected to end at 12.1 mill barrels per day this month, McQuilling said; however, levels remain above 2016 figures and a rise to 13.2 mill barrels per day in July 2017 is foreseen (JBC Energy). 

Higher crude runs are expected to coincide with a decline in regional crude production, widening Europe’s crude deficit and increasing import requirements. As such, crude volumes into Europe are likely to reverse from last year and rise in tandem with refinery intake.    

Traditionally, the majority of Northern European crude imports stem from regional production and exports out of West Africa; however, in 2016, Nigerian militant conflicts caused significant supply disruptions and crude flows from this region fell 33.5% year-on-year. 

This freed up market share and allowed Middle Eastern producers to stake their claim, as an 11.5% year-on-year growth in volumes in the Middle East/ Northern Europe route was seen last year.  These flows were supported by Iranian efforts to ramp up output to the pre-nuclear sanctions level of 4 mill barrels per day and regain previously lost market share in Europe. 

While higher flows from the Middle East partially offset the drop in West African exports, overall trade volumes into Northern European declined by about 1.6 mill monthly tonnes in 2016, which pressured tonne/mile demand down about 3.4%.   

A similar story was seen in the Mediterranean region, as volumes out of the Middle East increased by 10.9% year-on-year, while imports from West Africa fell 33.7% in 2016. Declining production in the Caribbean region put pressure on outflows to the Mediterranean; however, these declines were more than offset by increased imports from the North American Gulf/East Coast due to a rise in US crude exports. 

As a result, overall tonne/mile demand into this region rose 3.9% year-on-year in 2016, largely due to higher trade volumes from more distant supply centres.  

Going forward, strong product demand in Europe is expected to drive increased refinery runs, which, when coupled with fundamental shifts in the regional oil supply, are likely to support dirty tanker demand into the area. 

In the event of a stop to the OPEC-led production cuts, we do not expect to see significantly higher volumes of Middle Eastern crude make their way to European markets, as these flows will likely return to traditional customers in the East with the exception of Iran, McQuilling said. Higher imports are projected to stem from other regions, such as the Mediterranean, Black Sea and West Africa.  

Since September, 2016, the consultancy observed a gradual recovery of Libya’s upstream oil sector driven by easing militant conflicts and concerted efforts to boost national oil output. In the second decade of May, 2017, the state run National Oil Corp reported oil production at 796,000 barrels per day, significantly higher than the 270,000 barrels per day recorded in August, 2016. 

McQuilling said that it had already noted this supply hit the market, as analysis of its remotely-sensed vessel position data indicated 38 Libyan loadings were bound for the Mediterranean in the first quarter of 2017, which compares to just 12 in the same period a year previously. It is forecast that Libyan crude will remain a major feedstock for European refiners, supporting Aframax trading in the Mediterranean; however, some downside risk remains of a potential resurgence of political conflicts.  

In addition to Libya, support for this market was seen out of the Black Sea, as Kazakhstan production continued to rise on the back of higher output from the Kashagan and Tengiz oil fields. Nationwide, production has risen to over 1.7 mill barrels per day, contributing to an 18.8% year-on-year increase in Black Sea loadings over the first four months of 2017. 

Operations at Kashagan are on track to bring oil field output up to 370,000 barrels per day before the end of the year, underpinning expectations for a continuation of higher Black Sea flows into the Mediterranean and Northern Europe, supporting tanker demand for both Aframaxes and Suezmaxes, McQuilling said.  

Further support for Suezmax demand is predicted to stem from West African exports (recovering Forcados crude) to Northern Europe, as a recovery in West African crude output to 4.8 mill barrels per day before the end of 2017, is forecast. 

The expanding crude supply is expected to offset stagnant production in the UK and Norway, paving the way for crude exports to European refiners. This notion is further supported by a reduction in Russian crude exports through the Baltic port of Primorsk, as conversion work to increase diesel flows on a section of the Baltic Pipeline System (BPS) commence. 

Over the summer months, we expect support for the Suezmax sector to stem from increased crude exports out of the Black Sea and West Africa. Through the next three months, TD20 is forecast to average around WS86, while TD6 is projected at WS85, McQuilling concluded. 

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