CLEAN TANKER QUARTERLY: Americas freight bonanza hinges on product availabilities, ballasters

The verdict is out on how far into the second quarter Americas clean tanker markets can sustain the fixing bonanza that has driven freight to peaks not seen since the third decade of April 2020, when pandemic-related global lockdowns prompted steep contangoes on the oil markets and put over 200 million barrels of crude and products into floating storage, taking up roughly 5% of the global tanker fleet.

Currently a shortage of local diesel supply in the Caribbean and South America amid heightened power generation demand, reduced refinery utilization rates and an increased call on diesel during the harvest season in Argentina and Brazil were seen to prompt the strong charterer inquiry, which quickly depleted Medium Range tanker tonnage opening on the US Gulf Coast. The tonnage squeeze had some charterers upsizing their 38,000 mt stems to load onto Long Range 1 tankers, which typically carry 60,000 mt cargoes.

The onset of the fixing bonanza, which coincided with Russia's Feb. 24 invasion of Ukraine, boosted Medium Range US Gulf Coast loading clean tanker benchmark spot rates by 180% to the Caribbean, 170% to Brazil, 260% to the UK Continent and 112% to Chile between Feb. 23 and April 6, according to data from S&P Global Commodity Insights.

"It is hard to see this stopping, to be honest; can't see where the relief may be coming from," a shipowner said.

"I think this is a tonnage squeeze," a second shipowner said, noting that spiking freight rates had re-shut the diesel arbitrage on the backhaul route from the USGC to Europe and helped raise international products prices above domestic South America market levels.

Diesel arb firmly shut

Analysis from S&P Global Commodity Insights showed that the diesel arbitrage had been pried open on March 7 to $1.38/b for the first time since Nov. 27, 2018, as European diesel importers have sought to replace self-sanctioned Russian products barrels into Europe. Russia has exported 1.1 million b/d of products and 820,000 b/d of refinery feedstock from the Baltic and the Black Sea. According to S&P Global analysis, 63% of Russia's clean products exports headed to Northwest Europe and 16% to the Mediterranean in 2021, with 90% of the trade dependent on Medium Range tankers. While ULSD flows from the USGC to Europe did work on an open arbitrage from March 7 through March 30, the arb has been firmly shut since to be indicated at minus $15.70/b basis April 5 data.

Regardless, charterers with downstream assets on either side of the Atlantic, such as international refiner and marketer Valero, have been booking tankers to cover diesel stems. Petrochemical companies Dow and Ineos have also contributed to the vessel flow across the Atlantic, as they have been transporting naphtha cargoes from the USGC to their European downstream assets, while the East-West naphtha arbitrage appears to be a continuous challenge.

"Until Europe can figure itself out and the barrels are sitting in the east, the only place saving the world is the USGC -- it's the only outlet," a charterer said. "It is crazy, the rates we are seeing, but it is that tight. Cargoes are not stopping anytime soon. It's a big sting right now, but charterers will be prepared for a later recovery."

Backwardation spurs end-month fixing

In the Americas, the recent end-month fixing spree was spurred on by a steep backwardation on the NYMEX ultra low-sulfur diesel futures contracts, with April ULSD swaps trading from $8.1/b to $11.7/b above the May contract during the last decade of March. Traders attempted to delay the contract roll by fixing cargoes as late as possible, causing charterers rushing to a market already primed with incredibly tight tonnage against a plethora of USGC-loading cargoes to be covered at first to the Caribbean, then to destinations on the east and west coasts of South America as well as to disports across the Atlantic. Since the products markets continue to be steeply backwardated, with the frontline ULSD May/June swaps spread indicated at $7.50/b on the April 6 market close, the recent past could repeat itself and underpin the recurrence of an end-month fixing spree.

Ballasters to the rescue

While most shipowners appeared to be chasing the dollar at present, further into the second quarter a good number of ballasters could cap the upside of the Americas freight market.

"I do think some European ballasters will get here at some point, which could cause some pressure, but the cargo still seems to flow," a third shipowner said.

With the USGC market presently the highest priced region globally, owners are prone to give repositioning of their fleet some serious thought weighing the East of Suez diesel pull to Europe versus flows from the USGC.

"There should be more demand of US Gulf Coast products barrels, as we are now starting to see the effects of the Russian-Ukraine war," a fourth shipowner said.

Product availability on the USGC and the number of ships ballasting to the region will dictate whether this fixing bonanza can support current rates.

ULSD stocks on the USGC stood at 104.5 million barrels the week ended April 1 and at a March average of 103.9 million barrels, the lowest onshore inventories since 2014, according to latest data from the Energy Information Administration.