Counter to market expectations, Americas clean tanker freight rates have plunged ahead of the upcoming EU ban on Russian oil product deliveries to Europe, amid limitations to supply and demand of diesel.
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This comes as demand from Europe has yet to significantly materialize for US Gulf Coast barrels, with Russian product still traveling to Europe at significant levels and amid low US diesel export volumes.
The US Gulf Coast-to-UK and Continent diesel route is showing pronounced losses. Platts, part of S&P Global Commodity Insights, assessed it at 75 worldscale -- just $17.79/mt -- Jan. 27, down 78% from its recent peak at 345 worldscale Dec. 2, when a strong pull for vessels from the USGC to Latin America resulted in tight tonnage on the Gulf Coast.
Lowest since January 2022
Freight rates have not reached these lows since January 2022, Platts data showed. This was prior to Russia's invasion of Ukraine in February and the resulting slew of international sanctions including an EU import ban on Russian oil products, expected to hit the European diesel market hard and send it seeking resupply of around 2.5 million mt a month from elsewhere.
This has been widely touted as a bullish development for tankers, especially clean tankers, as it increases the distances vessels need to travel. This has bullish implications for freight rates, reducing available tonnage as vessels are tied up on longer journeys.
However, this bullish effect has yet to percolate through to the USGC-UKC freight.
Shipowners' earnings are taking major hits, with the current time charter equivalent for the 38,000 mt US Gulf Coast-UK Continent route down to roughly minus $3,700/d, sources said.
The USGC has been one of the main alternative loading regions for diesel supply into Europe alongside East of Suez, but the UK Continent has continued to import a lot of Russian diesel into late January, hampering demand for alternative imports, according to tanker tracking data.
Russian diesel exports remain buoyant
There has been muted export activity from the USGC to Europe, and this has dampened demand for clean freight.
Market participants in the US diesel market attribute the lack of exports to a backwardated market structure, which disincentivizes longer voyages as cargoes lose value over time.
"It's been hard to time and make that work," one trader said.
USGC-Northwest Europe shipments in January of middle distillates were 340,400 mt, down 64.6% from December. Of those, ultra low sulfur deliveries were 291,700 mt, down 68.1% from December, according to data from S&P Global.
European traders expect a significant tightening of the European diesel market from the second half of February, once sanctions are felt. If USGC-UKC freight rates remain at current levels, this could spur a flurry of fixtures in coming weeks as landed values in Europe are expected to increase significantly, sources said.
Total distillate exports so far in early 2023 are elevated compared with the same period a year ago, US Energy Information Administration data shows, but are roughly in line with levels seen in early January over the past decade. The agency pegged US distillate exports for the week to Jan. 20 at 1.106 million b/d.