INTERVIEW: Scorpio expects tanker rates to surpass prewar levels on restocking demand

Oil tanker owner Scorpio Tankers sees limited upside from potential US Jones Act waivers, but expects refinery closures and supply chain dislocations to support rates above pre-conflict levels as markets prepare for a re-opening of the Strait of Hormuz.

Jones Act waivers, which would allow foreign-flag vessels to transport petroleum products between US ports, represent only a modest opportunity for Scorpio's fleet unless severe domestic fuel shortages emerge, executives said on the sidelines of the Marine Money Conference on June 17.

Refinery shutdowns, which have pushed production further from consumption centers and have increased long-haul seaborne trade, remain the bigger structural driver.

"There's good opportunity there, we would transact if an opportunity came up but there's not a lot of volume," Chris Avello, Scorpio's CFO, said of Jones Act waiver prospects.

Refinery impact

The closure of refineries, particularly on the US West Coast, has fundamentally altered product trade flows by forcing regions to source supplies from more distant locations like Asia, boosting ton-miles -- the key metric of shipping demand that multiplies cargo volume by distance traveled.

"That's the main thing with the refineries -- that's why ton miles has really been the driver for us, it's not only that demand is really strong," James Doyle, Scorpio's head of corporate development and investor relations, said.

The structural shift in refining capacity has supported product tanker demand even as US refined product exports have declined. In May, US refined product exports fell to 18 million barrels/day from 21 million b/d a year earlier, yet the product tanker market remained strong, Doyle said.

Jones Act waivers would become more critical if the Strait of Hormuz remains closed and domestic supply chains break down, Avello said.

"If the Strait doesn't re-open, and you have geographic areas in the US that are not producers, they rely on the East Coast gasoline," he said. "If for some reason that dried up, if East Coast inventories reach tank bottoms, then you need those waivers."

Platts, part of S&P Global Energy, assessed the Jones Act Medium Range term-charter rates at $91,000/day on June 17, falling $500 from June 10. Market participants told Platts that the lack of activity has maid them anticipate rates will drop in the coming weeks.

Total gasoline stocks on the US Atlantic Coast grew for the third consecutive week ended June 12, according to data from the US Energy Information Administration published June 17, while imports continue to track below levels seen a year ago.

The increase was likely a result of growing gasoline production at the East Coast refineries during the week, with output having risen 71,000 barrels/day to 3.28 million b/d. Refinery utilization in the region also grew 3.1 percentage points to 87.1%, the EIA said.

Market outlook

Scorpio expects product tanker rates to settle above pre-conflict levels even as oil flows through the Strait of Hormuz normalize toward the previous 20 million b/d capacity. Avello pointed to vessel dislocations, restocking activity and potential infrastructure damage as factors that will support rates during the transition period.

Doyle said the company expects rates to return to around $30,000/day for MRs and $40,000/d for Long Range 2 tankers that were seen before the conflict in the Middle East began, " plus higher, given dislocation."

"Things won't return to normal right away and we'll see restocking start to happen," he added.

Before the effective closure of the Strait in late February, the product tanker market was reaching highs not seen since the Russia-Ukraine conflict, driven by consumption growth and a balance between vessel supply and product demand. That strength came despite Very Large Crude Carriers trading in the product market and cannibalizing LR2 business in 2023 and 2024.

The normalization process faces uncertainty around whether price differentials will be sufficient to redirect traditional trade flows and what role geopolitical risks might play.

"What if the Iranians decide to nationalize the strait? Will that be enough to deter products?" Avello said.

Vessel dislocations will need time to recalibrate, as countries will need to restock inventories, and the extent of any infrastructure damage remains unknown, the executives said.

"Those things need to return to normal before we know what 'new normal,' looks like," Doyle said.