CLEAN TANKER QUARTERLY: Americas product tanker freight to end year with continuous volatility

Freight continues to oscillate at unprecedented levels for US Gulf Coast refined product exports and the volatility is expected to continue into the fourth quarter of 2022, prompting market participants to prepare for the uncertain environment amid looming Russian sanctions.

Increased product demand in Latin America coupled with a rerouting of European product demand amid the Russia-Ukraine conflict has created a sky-high rate environment, but also one of immense volatility as charterers adapt to moving cargos within freight peaks and troughs.

Latin America product demand is expected to stay robust, with gasoline and diesel demand clocking in at 20,000 b/d and 250,000 b/d higher than prepandemic Q4 2019 levels, respectively, according to the Latin American Oil Market Forecast from S&P Global Commodity Insights.

Freight for the 38,000-mt USGC-Chile run peaked for Q3 at $3.8 million on Sept. 22-23, after averaging $2.9 million for the quarter, up from the $2.763 million average in Q2.

In addition to the historically higher freight environment, both Worldscale and lump sum routes have seen high levels of fluctuation. Notably, the daily change for freight on the 38,000-mt USGC-Brazil run averaged w18.7 in Q3 and w21 in Q2, compared to Q1, when it averaged w5.8.

Time-charter activity could increase with hedging attempts

With volatility causing problems for charterers in hedging risk, shared thoughts of the favorability of booking ships on a time-charter basis instead of spot are circling the market as participants expect an increase in the USGC region to become more prominent. Time-chartered ships are booked for a set period at an agreed upon rate instead of on a voyage-by-voyage basis seen in the spot market.

This uptick could also increase the availability of charterers bringing those time-chartered ships into the spot market in the form of relets, putting them in the position of a shipowner and potentially benefiting from the fluctuations in rates.

"Probably yes, it would be a form of securing more certain [freight] levels," a shipbroker said, noting that charterers are having to bear the brunt of freight volatility given demand has yet to cease for refined product exports for the USGC.

As the Northern Hemisphere transitions into the winter season, market participants anticipate worsening volatility as freight rates typically see their annual rate highs heading into November and December.

The seasonality comes from typical refinery activity ramping up in the last few months of the year following turnaround season. US refinery runs reached above the 16 million b/d level May-August, only falling below that level in September to 15.8 million b/d, according to the Global Refining Outlook from S&P Global Commodity Insights. This is expected to drop further in October to 15.5 million b/d only to increase sharply back above the 16 million b/d level in November and December.

"If anything [freight volatility] will get worse as we throw winter seasonality into the mix and European buyers being hit with the deadline on sourcing product from elsewhere," a charterer said.

Russia-Ukraine conflict adds uncertainty

With the onset of the Russia-Ukraine conflict, Europe had pledged to self-sanction 90% of Russian product by the end of the year, prompting a further surge in clean tanker movement from both the Persian Gulf and the US Gulf Coast as the main regions for replacing Russian barrels in the coming months.

However, another predicament has emerged amid the already delicate trade situation. The US Treasury Department released a preliminary guidance statement on implementation of maritime services policy and related price exceptions for seaborne Russian oil on Sept. 9. The G7 countries and the EU will implement a price cap policy on seaborne Russian oil, to take effect Feb. 5 with respect to maritime transportation of petroleum products.

The policy holds an exception to the price cap, in which "actors that purchase seaborne Russian oil at or below a price cap to be established by the coalition (the price exception) will expressly be able to receive such services," according to the statement released by the US Department of Treasury.

Fundamentally speaking, this move is expected to further penalize the revenues of actors that continue to transport Russian barrels atop their fleet.

Major clean tanker owner Torm expects a 7% increase in product tanker ton-mile demand after February 2023 due to the Russian oil sanctions, according to a presentation released by the company Sept. 29. The replacement of Russian barrels by Europe with products from the US and Middle East, as well as the shift in movement of Russian barrels to Latin America and Africa will command this increase, the shipowner said.