Americas LR1, MR rates diverge on European storage demand, bearish USGC

A global shortage of larger Long Range 1 and 2 tankers due to high floating storage demand in Asia and Europe for clean petroleum products has pushed LR1 freight out of the US Gulf Coast to sky-high levels despite a slow trickle of demand for the tankers and for floating storage in the region.

Typically dollar per metric ton values for a given route are higher on Medium Range tankers than on Long Range 1 tankers due to economics of scale. However, with LR1s short globally and earnings high for LR1s in Europe and Asia, freight for LR1s loading in the Americas has increased to compete with European and Asian rates, which has pushed the $/mt rate on the USGC-Japan/South Korea route higher for LR1s than the smaller MR vessel class.

Wednesday, the 60,000 mt USGC-Far East route was assessed at lump sum $2.9 million, or $48.33/mt, increasing $300,000 day on day on market indications. The 38,000 mt USGC-Japan/South Korea route was assessed down $200,000 day on day on trading activity at lump sum $1.35 million, or $35.53/mt.

LR1 owners have said that, with the $/mt values so high on LR1s compared to their MR counterparts, fixing in the USGC has been difficult.

"Essentially my hands are tied until the MRs do something," a shipowner said Wednesday. "If you're looking at the Mediterranean-East run you're getting $55 per day."

Last week a second shipowner said the LR1 market in the USGC was essentially non-existent, as charterers would choose MRs for long-haul runs to Asia and Brazil, which typically see most LR1 activity out of the USGC.

MR freight has dropped consistently on most USGC-loading routes in the past two weeks due to a dramatic coronavirus pandemic-driven fall in petroleum product demand globally. Most activity has been focused on naphtha exports to Asia, a route typically ran by LR1s in addition to MRs, however Platts fixture logs showed just one LR1 booked in the last month to load naphtha on the USGC and discharge in Asia, whereas ten MRs have been put on subjects to load in March and April.

WIDENING GASOLINE CONTANGO, JET GLUT DRIVE EUROPEAN FLOATING STORAGE DEMAND

Floating storage in Europe has mostly been fixed on LR1 and LR2 tankers holding jet fuel, although gasoline has become increasingly favorable for floating storage as well with the prompt gasoline market falling in the region. European shipping sources said MRs are now being pursued for storage in the region, which would raise freight for that vessel class as well.

The most recent floating storage deal was fixed by Clearlake, with the Torm Maren booked to hold a 90,000 mt cargo of gasoline for four-to-six month storage at $47,5000/day. The ship is scheduled to load the fuel April 8-9. Previously, the LR1 Torm Sara was heard to have fixed for 60,000 mt of jet fuel storage at $31,000 per day, however this ship was also heard to have failed on subjects.

"The rates are completely dependent on timing," an Americas LR1 owner said Wednesday. "Storage numbers can get wacky because terms and durations vary. It's all over the place. There are definitely high numbers. The market over there, you could see $48,000/day and that's for the better part of 40 days."

A race could, however, ensue should the expected drop-off in physical demand for oil products materialize. Current time charter earnings for floating storage options could potentially come under downward pressure should a larger number of owners be more willing to opt for floating storage over product shipments.

Shipowners are therefore wary that less attractive rates now could be lucrative in a market where expectations of a dearth of cargoes for shipment is looming.