Destocking clean tankers flooding market, depress Q3 freight: Scorpio

Houston — An unraveling of floating storage contracts set up in the second quarter of 2020 has exacerbated typically weak third quarter clean tanker spot rates, Robert Bugbee, CEO of Scorpio Tankers, said during the company's Q2 earnings call Aug. 6.

Executives on the call said, however, that increasing refinery utilization and improving demand globally indicated a positive outlook for what is typically a stronger winter season.

Scorpio Tankers announced stronger-than-expected time charter equivalent earnings for clean tankers in Q2, with Medium Range tankers earning an average daily revenue of $21,808. Comparatively, TCEs for MRs in Q3 as of Aug. 6 earned an average of $15,300/day. TCEs for Q3 through Aug. 6 have been higher than average Q3 2019 TCEs across all segments, however, with MRs outperforming the year-ago average of $14,300/day in the second quarter. The larger Long Range 1 tankers have averaged $22,000/day in Q3, compared with $15,000/day in the year-ago period.

The strength in Q2 was heightened by refined product contango structures that pushed charterers to use product tankers for floating storage, tightening spot tanker availability globally and boosting freight levels to record highs. However, those floating storage contracts began to unravel at the end of Q2 and into Q3, putting pressure on rates and exacerbating the traditional weakness of the summer months.

Scorpio Tankers Commercial Director Lars Nielsen said around 105 million barrels of petroleum products were on the water in floating storage in early May. By the end of July, this had decreased to around 52 million barrels and then to around 45 million barrels as of Aug. 6. Bugbee said Scorpio saw destocking of vessels storing refined products, decreasing the number of tankers on the water from around 87 to somewhere in the low 30s at the start of August.

Nielsen said overall refined products on the water, including barrels held on floating storage contracts and those in vessels carrying cargoes for delivery, stood at around 415 million barrels, compared with an average of around 390 million barrels for the last two years. Demand for gasoline and diesel has increased, and therefore exports from the US Gulf Coast and Arab Gulf have increased, giving otherwise weakened and tonnage-saturated markets some support.

Despite the destocking of spot tankers and the unwinding of floating storage deals, Nielsen said a resurgence in inquiries about storage was seen in August, with some parties looking to extend existing storage contracts on larger clean tankers and some looking to ink new contracts. Some charterers have looked at taking ships on time charters, which would allow storage at the charterers' discretion. Nielsen said Scorpio expects storage and time charter inquiries to continue to some degree into Q3, and maintains a positive outlook for the seasonally stronger final quarter of the year.

ULSD inventory, USGC refinery utilization rises

Increasing refinery utilization and demand in Latin and South America made for a slightly stronger July for clean tankers in the Americas, with freight peaking at $36.23/mt on the 38,000 mt USGC-Brazil run July 22-23. However, increasing tonnage availability in the region and slower cargo supply depressed freight, which then fell 17% by July 31 to $29.83/mt. Freight fell further in August and was assessed at $27.70/mt Aug. 6 amid a lack of testing.

Owners are optimistic that higher refinery utilization rates could support freight for later August dates, however, with product demand in Mexico and South America increasing and diesel stocks rising on the US Gulf Coast. The US Energy Information Administration reported refinery utilization at 82.3% on the USGC in the week that ended July 31, compared with 78.3% in the week that ended June 26. Diesel stocks reached record high levels at the end of July, with the EIA reporting 54.69 million barrels of ULSD inventories on the USGC. This level marks the highest regional stock level since the EIA began recording the data in the week that ended April 9, 2004.