WAF, USGC Suezmax markets still adjusting to Russian crude displacement

Suezmax tanker segments west of the Suez Canal are continuing to see freight volatility as Europe looks to cover crude demand amid ever-shifting trade flows following Russia's invasion of Ukraine Feb. 24.

Both the West African and Americas Suezmax markets experienced a spike in early April, with rates recording substantial gains. The 130,000 mt West Africa-UK Continent route was assessed at w180 April 8, recording a 71% increase compared to March 31 when the market was assessed at w105. Similarly, freight for the 145,000 mt US Gulf Coast-UKC route saw a 39% increase over the same period.

Enquiry for both the USGC-UKC and WAF-UKC routes picked up on the back of strong European demand for US and West African grades, which coupled with tight tonnage availability in the two regions led to a jump in freight rates. Real returns for owners, however, remained largely unchanged on the back of higher bunker fuel prices.

Low European inventories in middle distillates and record high cracks stemming from the Russian invasion of Ukraine underpinned much of the interest in West African crudes.

WAF grades saw demand spike for April loading after an initial lull in the immediate aftermath of the conflict. Downstream, as European consumers shunned Russian diesel and jet fuel, inventories thinned, and cracks skyrocketed.

Light-to-medium-sweet Nigerian crudes, rich in middle distillates, were snapped up by refiners seeking to maximize runs and cash in on record margins. The anticipated loss of Russian Urals crude supplies due to sanctions packages also made some buyers seek alternative supplies or bolster West African purchases. Platts, part of S&P Global Commodity Insights, assessed Nigerian Forcados at a $3.70/b premium to Dated Brent March 30, up $1.55/b since the start of the month.

Angolan crudes, typically reliant on Chinese demand have been forced into Europe in greater numbers, often at steep discounts. Angola exported 318,000 b/d to Europe in April, its highest level since August 2016, according to Kpler shipping data.

Shifting trade patterns

WAF was displaced by heavily discounted Urals heading to key Asian buyers India and China. Lockdowns spurred by a resurgence of COVID-19 cases further dampened global demand in the world's largest crude importer leaving West African crudes overwhelmingly pointed at Europe. This has resulted in increased short hauls with tonnage lists in Europe being replenished at a much higher pace. At the same time, the ships that loaded in the USGC in early April and are now arriving into Europe have put additional pressure on tonnage supply, enabling charterers to chip away at last done values.

The spike weighed hugely on crude demand, coinciding with a glut in light sweet grades aimed at Europe from the US, Mediterranean and West Africa. Combined, this ultimately squashed the rally in WAF grades and sharply corrected values.

Freight has shifted lower since the rate increases, with the 130,000 mt WAF-UKC route assessed at w87.5 May 17, a 51% drop compared to April 8. Ample tonnage availability in the region coupled with beneficial freight economics for VLCCs are expected to cap any rate improvement for Suezmax markets. Charterers have been increasingly looking at VLCCs to take advantage of economies of scale, with WAF-UKC trade for that route expected to grow further in the future.

Trans-Atlantic VLCC trade rising

A similar dynamic has played out on the USGC VLCC front, which has seen an increased number of VLCCs booked for USGC-UKC runs amid the European crude demand surge. There were five VLCCs booked to make the voyage in March and three in April, with two already placed on subjects so far in May. This is up from the two total seen in January and February, prior to the invasion.

Freight for trans-Atlantic voyages out of the USGC has slumped nearly 74% since peaks seen in early April. Crude exports out of the USGC spiked in the week ending April 15 at 4.27 million b/d and have since fallen to 3.52 million b/d in the week ending May 11, despite a rebound from the week prior. In the week ending May 6, the four-week moving average however reached its highest level since March 2020 when a steep contango structure sent exports soaring.

Strong exports of USGC crude are expected into the coming months as the US continues to release a historical combined 180 million barrels through October, adding 1.3 million b/d in incremental supply to the market from April through October, according to S&P Global data.