DIRTY TANKERS QUARTERLY: Favorable crude export environment to fuel freight amid storm season

A combination of increased trans-Atlantic movements out of the US Gulf Coast, a resurgence of Asian crude demand, and an overall favorable US export environment is expected to lend bullish support to Americas dirty tanker freight heading into the third quarter of 2022, with a ramp-up in the summer hurricane season and geopolitical uncertainty continuing to fuel volatility across all ship classes.

All eyes are on USGC crude export demand heading into Q3 2022, carrying on from patterns seen in Q2.

In April, the US exported just below 3.24 million b/d in April, with Europe taking 49% of the share, while Asia sat back and took 33.3%, according to the US Census Bureau. This is a shift from before Russia invaded Ukraine. In January, Asia dominated 51% of US exports and Europe at 35.5%. This is a trend expected to continue, however, total Asian demand is recovering as coronavirus lockdowns are reversed.

Arbitrage economics are proving favorable for importing WTI in addition to the periodic release of crude barrels from the US Strategic Petroleum Reserve.

As of June 30, WTI crude is $7.85/b cheaper for European crude importers over domestic Forties grades, according to the crude ArbFlow calculator from S&P Global Commodity Insights.

In May, 24.1 million barrels were withdrawn from the SPR, with 25.2 million barrels already released in June and a total of 45 million barrels offered for delivery in mid-August through September. The Biden administration committed to release a total 180 million barrels from May to October.

In addition, a tight very low sulfur fuel oil, or VLFSO, market in Europe is expected to lend extra support to WTI demand as European buyers look to take advantage of cheaper barrels and the favorable refining content for VLSFO.

Freight for the midsize tankers has proven highly volatile, with the uptick in demand for trans-Atlantic runs driving the fluctuations in tonnage availability.

The cost of taking an Aframax on the 70,000 mt USGC-UKC run jumped as much as 81% from mid-March to peaks seen April 7-11, only to fall back on May 11 to levels last seen on Feb. 23, the day before Russia's invasion of Ukraine. Freight for the route has fluctuated back to just below peak levels, only to sink to over one-month lows in June.

The Forward Freight Agreement, or FFA, market reflects bullish market sentiment, with the 70,000 mt USGC-UKC contract trading for the second half of 2022 at $35.3808/mt, or w189, June 29. The July contract last traded June 30 at $34.6320/mt, or w185.

The surge in trans-Atlantic flows saw an increase in Suezmax freight as well, with a spike seen since the day Russia invaded Ukraine as large as 123% when peak levels were reached April 6-11. Freight for the 145,000 mt Suezmax USGC-UKC run was last assessed June 30 at w92.5, or $16.86/mt

Shipclass intertrade brings trade shift

Shipclass intertrade between the dirty tankers has spiked since the Russian invasion of Ukraine, with an increase in VLCC vessels seen booked for USGC-Transatlantic routes, voyages most often made on midsize Suezmax or Aframax ships.

This trade flow shift is expected to further increase volatility in the midsize tanker trade as VLCCs booked in the months ahead cannibalize cargos for the smaller tanker classes.

So far in June, a total of eight VLCCs have been booked for USGC-UKC runs, up from the five seen in March, according to S&P Global Commodity Insights fixture data. Only two VLCCs were employed for trans-Atlantic runs in January and February 2022.

For Suezmaxes, so far only four vessels have been booked for USGC-UKC runs, down from the 12 seen in March. The Suezmax sector has remained strong, however, as they continue to see heavy utilization on South America-origin flows. In June, 13 South American loading Suezmaxes were booked for voyages with various disports.

Storm seasons creates volatile foundation

The ramp-up of hurricane season in the Gulf of Mexico will further add fuel to the volatility seen in the midsize tanker markets. In the most active storm months of July-October, unpredictable weather delays and closures historically create ebbs and flows to tanker supply in the region.

The Houston Ship Channel saw approximately 200 hours of closure time in 2020 due to storm-related issues and around 30 hours in 2021, according to data seen by S&P Global Commodity Insights.