TANKERS: High US refinery utilization limits trans-Atlantic freight upside

The Americas Aframax market is poised for depressed summer freight rates as extended periods of lockdowns give way to a strong driving season, keeping refinery runs and US domestic crude demand high, according to market participants.

Shipowners with positions in the Caribbean and the US Gulf of Mexico have been plighted with low voyage earnings on limited charterer demand for moving crude since late April. Freight for the 70,000 mt US Gulf Coast-UK Continent route averaged w70.68, or $12.04/mt, during the first half of June. Freight for the route was assessed at w70, or $11.93/mt, June 16, down from a 2021 high of w135, or $22.95/mt, on March 11.

Although the summer months in the Northern Hemisphere typically see low demand for shipping crude globally, keeping ships unemployed and tonnage lists long, tight arbitrage economics for US crude exports have worsened the plight of shipowners.

The Brent/WTI swaps spread, one indicator of the competitiveness of US crude on the international market, narrowed 21 cents/b on June 15 at 1:30 pm CT to $1.71/b, the most narrow the spread has been since Nov. 21, 2016, when it was at $1.48/b. A narrower spread is generally associated with WTI-based crude being less competitive versus their Brent-based counterparts, hurting the competitiveness of those grades.

According to the S&P Global Platts Analytics crude arbitrage calculator, the incentive to ship WTI MEH crude from the USGC into Northwest Europe compared with Forties crude averaged minus 83 cents/b over the five-day period ended June 14. By comparison, the arbitrage incentive for WTI MEH into Rotterdam against local Forties averaged minus 49 cents/b in June while in May, the arbitrage incentive averaged $1.19/b.

Recent offer levels for WTI crude into Europe for July and August deliveries have been at particularly high levels, potentially causing buyers to look more at competitive North Sea grades, or those out of the Mediterranean or West Africa. The arbitrage incentive for both Algeria's Saharan Blend crude and Nigeria's Bonny Light grade against Forties into North Europe appeared open June 14 at a $1.01/b and a 97 cents/b incentive, respectively, according to Platts Crude Arbflow.

As the Northern Hemisphere moves further into the summer months, refiners would watch consumer gasoline demand amid a heightened driving season and more frequent vacationing, a freight trader said.

"A lot of people are anticipating that the summer here in the US will perform and mop up a lot of the products," the freight trader said. "Domestic [refinery] runs continue to increase and get stronger, so domestic demand [in the US] is getting stronger and that cuts back exports."

Indeed, the US refinery runs over the week ended June 11 rose to 16.34 million b/d, the highest level since the week ended Jan. 17, 2020, when the US refinery runs averaged 16.86 million b/d, according to data from the Energy Information Administration. On the USGC, refinery runs rose to just under 8.80 million b/d, also the highest level since the week ended Jan. 17, 2020, when USGC refinery runs averaged 9.22 million b/d, EIA data showed.

This came as implied demand for gasoline in the US, as shown by product supplied of finished motor gasoline, has averaged more than 9.08 million b/d since the week ended May 7, according to EIA data. Over the week ended June 11, implied gasoline demand averaged 9.36 million b/d, which, aside from the week ended May 21, was the highest weekly average since March 2020, EIA data showed.