Markets - Product tankers - where next?

Nov 27 2015

Rates for MRs operating West of Suez plummeted during the third quarter of this year, only to bounce back at the time of writing (20th November).

The fall was due to European refining margins coming under downward pressure, less arbitrage opportunities, weakening transatlantic trades combined with several newbuildings entering the market, Gibson said in a report on Transatlantic flows. 

Earlier this month, TCE earnings for 37,000 tonne gasoline cargoes from UK/Continent to the US Atlantic Coast (TC2) peaked at $21,750 per day, due to an increase in Atlantic cargoes into the US driven by a delayed restart of a Canadian East Coast refinery, which is a major supplier of gasoline to the US.

In addition, there was more positive news on US Gulf product exports. For example, the US Gulf-UK/Continent trade (TC14), basis 38,000 tonne cargoes, had surged by WS60 points since early November and by 20th November was trading at WS115 (about $18,500 per day).

Product exports were supported by US refineries ramping up production during the turnaround, while uncertain tanker itineraries meant that charterers had less of a choice of tonnage. To an extent, Panama Canal transit delays also affected tonnage supply.

As TC14 firmed, this encouraged tonnage not to ballast back to the UK/Continent following the discharge of European gasoline on the US East Coast, which impacted on TC2 tonnage availability.

There was also some optimism in the short term. The recent oil price volatility offered some support for European refining margins, which had started to strengthen again. By the third week of November, European gasoline refining margins were close to their highest levels since August and refineries were running on full capacity.

This situation was also supported by strong West African import demand and also further afield, Gibson said. Strong export levels had a twofold effect- generating more tanker trades, while at the same time, leading to a drop in gasoline stocks, reaching their lowest levels since late May. 

On the downside, in the first half of 2016, deliveries are likely to remain at high levels - around 65 Handy/MRs, although some slippage is likely. After this period, the number of deliveries should fall rapidly, which could help the market in the longer term.  

In a Webinar this week on the back of a report - ‘Product Tanker Market Review and Forecast 2014-2020’ - Drewry’s Nikhin Jain said that ‘swing’ tanker could affect the products market going forward. These are vessels that are able to ship chemical and products and due to the products market being more attractive, chemical/product carriers have switched trades adding pressure on the products market. 

Jain said; ”We expect a significant portion of the ‘swing’ tonnage (about 80%) to continue to trade in the refined products market, due mainly to the relatively better freight environment in the product tanker sector. This should lend some much-needed support to the chemical tanker market. We are already seeing some signs of relief in the form of a slow, gradual improvement in chemical tanker rates since the start of this year.”

Drewry said that that current momentum seen in non-OECD countries would be sustained, albeit at a slower pace. Non-OECD Asia and the Middle East refineries will drive the market going forward.

Continued low crude oil prices would mean slower growth in non-OPEC crude supply (mainly from North America). This in turn would lead to reduced growth in products exports from the US – one of the factors that have been driving demand growth in recent years, so low crude oil prices might have a negative impact on products tanker demand.

On the other hand, low oil prices will also help to fuel oil demand, particularly from the fast growing Asian economies. “So one has to sit back and measure the impact of these two opposing forces before reaching any conclusion,”Jain said.

“Surplus gasoil from the US has been heading to Latin American and European destinations, and we expect this to continue for the foreseeable future. Net surplus gasoline from the US and Europe will be increasingly diverted to African markets. As a result, we expect higher trading volumes and longer average voyage distances for transatlantic MRs if the net surplus/deficit in US and European gasoline/gasoil continues to grow. However, the overall market is likely to be depressed by falling utilisation levels over the next couple of years,” Jain said.

Although a relatively specialist cargo mainly carried in LR1s and LR2s, Naphtha was the one cargo to watch, Jain said, especially as the expanded Panama Canal is expected to open up Asian trade from the US to larger shipments.

Drewry forecast that earnings would gradually come down from the current levels as the continuing low oil price will have a negative affect on US exports. There could be an increase in Asia/Middle East exports to the Atlantic but in Asia some downstream projects were lacking finance. Higher regional trades in Asia was also forecast.  

“Exports from Asia and the Middle East to the Atlantic, plus higher intra-regional trade activity have been supported by recent refining capacity expansions. So the scaling down of downstream expansion plans will have a negative impact on the demand for products tankers,” Jain said.

Turning to newbuildings, Jain said;“We think it would be unwise to order more new tonnage given the outlook of a decline in utilisation rates over the next couple of years. We recommend that owners look out for secondhand purchases when freight markets respond to falling utilisation levels, which we expect to happen next year.”

In general product trades are expected to grow at a CAGR of 2.3% during the period 2014-2020, slightly lower than the 3.9% witnessed in 2006-2014. Due to longer haul trades, tonne/miles are expected to increase by 2.8% per year. However, the product trading fleet is forecast to expand by CAGR 3.2% between 2014-2020, especially in the MR and LR1 segments, due to a firm orderbook and little demolition activity, plus the ‘swing’ effect. 

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