CLEAN TANKER QUARTERLY: Markets face increased vulnerability in summer months

Overwhelming tonnage, closed arbitrage opportunities and firming bunker fuel prices were the mainstays of the clean tanker markets for most of the second quarter, and will likely be the case heading into Q3 in the West of Suez basins.

Markets in the West of Suez Handysize and Medium Range tanker segments look set to bottom out into the third quarter, with little upside potential for various reasons, sources said.

Handysize markets in the continent and Mediterranean have been hit by consistently replenishing tonnage lists, unmatched by increased cargo inquiries. Initial hopes of the easing of restrictions in European markets leading to an uptick in refined product supply heading into the second half of the year have not materialized, locking in rates for Baltic-UK Continent shipments, basis 30,000 mt, at Worldscale 120 for the best part of the quarter.

Medium Range tanker markets relied heavily on front-haul transatlantic gasoline flows as the lack of back-haul options for ULSD from the US Gulf Coast continued to hammer sentiment, and the eventual product slowdown led to a bottoming out in late April, before settling at w110 in early June.

Long Range tankers experienced similar fortunes, despite a number of support factors in place for larger vessel classes. An uptick in ex-West Africa loadings to Brazil for refined products -- performed by ship-to-ship transfer from newbuild VLCCs making their way to the basin from the east -- helped tie up a significant number of vessels across the quarter, while June naphtha shipments reached multi-year highs as petrochemical crackers in the Far East came online to draw product from West of Suez.

But a slowdown for July markets and the spike witnessed in the crude oil complex toward the end of the second quarter extinguished any workable arbitrage opportunities for charterers, clamping down on new cargoes as a result.

Oil price conundrum

It is the crude oil complex overall that has primarily propped up bunker fuel prices, thereby reducing shipowner earnings to close to negative territory, and providing distinct problems.

The upward trajectory of the wider crude complex has resulted in bullish demand outlooks as the market emerges from COVID-19 conditions.

Delivered 0.5% sulfur Rotterdam bunker prices rose from $459/mt on April 6 to as high as $529/mt on June 28, highlighting the double effect of softening clean markets at the same time as incremental bunker prices.

With the International Energy Agency saying that it expects no substantial increase in oil production this year, the template has been set for a tanker market that will continue to be pressured by high feedstock prices in the medium term.

Outside of bunker fuel prices, recent upward surges in oil prices have wiped out any semblance of arbitrage opportunities on long-haul voyages, particularly for gasoline and naphtha.

Naphtha outright prices reached multi-year high levels for several consecutive days in late June, closing at $640.50/mt June 23, the highest since October 2018.

Amid strong gains in the wider crude oil complex, outright values in gasoline markets also reached multi-year highs June 23, with the front-month Eurobob FOB AR barge swap assessed at $696/mt June 22, up 1% on the day and the highest outright value since May 2019.

Market participants are now observing a potential resolution in OPEC+ negotiations regarding supply levels in the market, which could potentially feed down to the product tanker market by reopening arbitrage opportunities in turn.

USGC refining rates, internal product demand on the rise

In the Americas markets, shipping sources said increased demand for petroleum products locally in the US, particularly gasoline as mobility increases, have hampered spot movements out of the USGC.

Latin American demand has also been slow to recover in 2021, with countries in various states of lockdowns.

Refineries in the USGC have exited their maintenance season, boosting utilization rates at the end of the second quarter, with utilization having peaked at 92.9% in the week of June 4, the highest level observed since the week of Jan. 17, according to data from the US Energy Information Administration (EIA).

The two largest import markets for the US -- Mexico and Brazil -- started to come back online at the end of the second quarter, shipping market participants said, and a continued acceleration of product demand in those regions could give freight markets in the Americas a boost in the form of increased cargo supply.

USGC-Brazil flows up despite Brazilian imports from WAF

The emerging presence of newbuild VLCCs providing clean products in ship-to-ship transfers to Brazil did little to stem outgoing product from the USGC in Q2, despite barrels sourced from West Africa having reduced demand for more-expensive US grades.

Data from S&P Global Platts trade flow software cFlow showed three VLCCs laden with clean products in the first week of July positioned off the coast of Lome, Togo, totaling just under 900,000 dwt.

In the first half of 2021, a total of 1,792,811 mt of product flowed from West Africa to Brazil, compared with just 297,969 mt in the first half of 2020.

Should this continue, however, market participants expect the continued import of distillates into Brazil from WAF could continue to hamper flows from the USGC, potentially decreasing the number of available spot cargoes from the USGC.

USGC exports to Mexico and Brazil increased in Q2, and MR owners positioned in the Americas said they were optimistic that the full return of the two markets could push freight out of the USGC upward as demand for petroleum products increases globally.

USGC exports to Brazil reached an 18-month high in June of around 1,573,000 mt, the highest observed since December 2019, when flows reached around 2,180,000 mt, according to cFlow data.

The presence of Brazilian imports from West Africa, where maiden voyage VLCCs from Asia laden with clean petroleum products are reverse lightering cargoes for export, poses a problem moving forward for shipowners, however, and should this pattern continue with further newbuilds then this developing trade flow out of the USGC could well be compromised in the next quarter.