CLEAN TANKER QUARTERLY: Shipowners enjoy year-high returns in flourishing Q2

After a prolonged period of dismal earnings since the middle of 2020, a template for positive conditions for clean tanker shipowners was established in the second quarter of 2022, giving way to multiple tanker routes hitting two-year highs in this period.

A top-down depletion of tonnage levels due to more vessels travelling across the Suez Canal for available cargoes emerged as the primary reason for clean tanker markets to remain firm across the quarter. The re-establishment of pre-COVID oil product demand settled in the West, combined with the reluctance of pulling Russia-origin product due to the ongoing Russia-Ukraine conflict, paved the way for east of Suez markets in the Persian Gulf to provide product from the deficit emerging.

LR markets provide support base in west

There was eye-catching volatility across the quarter in the west in the Long Range tanker markets, dominated by proceedings in the east. Freight indications for Mediterranean-Japan shipments, basis 80,000 mt, grew from $2.675 million lump sum on April 1 to $4.75 million on May 15 – the highest witnessed since late-April 2020. Prices then witnessed a sharp drop to as low as $3.25 million on June 8, before rebounding once again to the yearly-high of $4.75 million on June 17.

LR owners made consistent ballast journeys from west to east in favour of attractive returns loading in the Persian Gulf hub, with back-haul distillates shipments dominating the first part of the quarter, and frequented runs for naphtha to far east Asia boosting the second half.

The re-establishment of optionality for LR owners to reposition therefore raised shipowner expectation in the west. Closed naphtha arbitrage opportunities for prolonged periods in the second quarter gave LR owners less cargo inquiry in the west, but shipowners consistently dug their heels in, with east of Suez markets providing a high floor for indications overall.

Black Sea markets pull away from Med Handysize relationship

Increased tonne-mile demand on LRs eventually translated to smaller vessel classes. MR transatlantic runs hit two-year highs in the quarter, with the bellwether UK-Continent-US Atlantic Coast rate, basis 37,000 mt, hitting w400 on June 10.

Attractive blending cracks from naphtha to gasoline and the commencement of the summer driving season in the US paved the way for high volumes of gasoline shipments to the Atlantic Coast basin in the quarter. Increased Latin American demand for distillates also split tonnage by giving MR owners the option to ballast down to the US Gulf Coast or go back to Europe.

But no returns were as attractive as the performance of the Handysize market in the Mediterranean and Black Sea. Black Sea Handysize markets veered further away from its cross-Mediterranean counterpart as a result of the Russia-Ukraine conflict when tonnage supply conditions in the Mediterranean grew ever scarcer late in Q2.

Freight indications for cross-Mediterranean runs, basis 30,000 mt, rose from w415 on June 14 to the year-to-date high of w515 on June 20. In the same period, Black Sea-Mediterranean runs went from w700 on June 14 but hit a w900 on June 21 – the highest on record as per data from S&P Global Commodity Insights, and a w385 point premium against cross-Mediterranean rates.

Short-haul markets enjoyed the benefit of the relative absence of tanker cannibalization in combination of the return of pre-COVID demand in the region. Furthermore, Black Sea charterers were obliged to bargain with a small pool of shipowners who saw the opportunity to capitalize on this, recouping losses sustained over the course of the last two years.

Positive conditions moving forward

The second quarter signalled a counter-seasonal demand push that reset the parameters on what to expect in the clean tanker market moving forward.

The bedrock of this will be the continued tonne-mile demand of larger tonnage as the west continues to transition away from Russia-origin product for distillates, but downside potential exists in the form of potential oil product demand destruction from soaring prices.

Steep backwardation in both ultra-low sulfur diesel and gasoline had on occasion disincentivized traders to build inventory levels for products as prices skyrocket, and many traders view the third quarter as a period of the drawdown of stock levels rather than build. This could stifle arbitrage pushes across key trading hubs and slow overall tonne-mile demand in the process.

Market participants remarked that freight highs experienced were 'not sustainable' for trades in the medium term, but also expressed confidence that markets would no longer plummet to the stagnant form experienced in the height of the pandemic.

"We're confident this will be strong and potentially even stronger in 2023 as new trade routes develop and the world readjusts to normality," a shipowner said.