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DIRTY TANKER QUARTERLY: Summer doldrums to continue in near term amid reduced flows

Highlights

Tight arb, high US refinery utilization capped Americas rates in Q2

Sustained freight recovery not expected in Q3 2021

Active hurricane season may provide occasional freight spikes

As the year moves further into the summer doldrums for crude shipping, dirty tanker freight rates already at or below break-even levels are set to remain depressed into the traditionally low-freight third quarter of 2021.

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Seasonal summer freight lows in May and June have been exacerbated by the ever-changing lockdown environment in Europe and Asia, as well as high domestic refinery utilization in the US, and weak arbitrage economics.

North Sea earnings dismal

Crude tankers in the North Sea and in the Mediterranean have faced unrelenting downward pressure through the end of Q2.Thin loading programs across European ports saw shipowners repeatedly facing negative earnings.

"It's tough because we are in at best break-even, or even negative territory," said a Geneva-based Aframax shipbroker. "The market is quite nasty at the moment."

S&P Global Platts' Aframax time charter equivalent assessments have trended downwards since early April, falling as low as negative $5,718/d June 7 on the UKC-UKC 80,000 mt Aframax route.

Poor USGC arb buoys Americas rates

For loadings on the other side of the Atlantic basin, freight for the benchmark 70,000 mt USGC-UKC route averaged w70.34, or $11.99/mt in June 2021, down from an average of $12.72/mt and $14.07/mt for the same month in 2020 and 2019, according to S&P Global Platts

Also making similar trans-Atlantic voyages, the Americas Suezmax segment continues to see depressed rates, with the 145,000 mt USGC-UK Continent voyage not trading outside a narrow range of w37-w40, or $6.14/mt-$6.64/mt since April 28 2021. The steady Suezmax market has put a cap on inter-tradable Aframax and VLCC ships, with charterers seeking to move barrels on alternative ship sizes as the more volatile Aframaxes or VLCCs see any type of price movement.

Unfavorable arbitrage economics for US-origin crude exports has left charterers seeking crude from other load regions, limiting trans-Atlantic voyages on mid-size tankers.

In June 2021, the cost for European crude buyers to import WTI MEH crude into Rotterdam versus domestic Forties crude averaged 25 cents/b more expensive, according to the Platts CrudeArb calculator.

Shipowner earnings continue to see impacts from not only low freight rates spurred on by limited demand and a lengthy tonnage list, but also from steep bunker prices. The price of low sulfur marine gasoil, that is, marine gasoil with a 0.1% sulfur content, delivered in Houston averaged $623.55/mt in June 2021, Platts data showed. That value was almost double the average cost for June of the previous year, and up $26.95/mt from the average price in May 2021.

Optimism to hit as soon as Q3 ends

After the coronavirus pandemic brought a year of sustained lows and volatility, characterized by occasional spikes, Platts Analytics, as well as market participants, expect a slow freight rate recovery is due during the second half of 2021.

Platts Analytics predicted July 15 that if OPEC+ finalized a deal, quotas would be set to rise by 2 million b/d by December in equal monthly increments. However, the outlook could change quickly: "If an Iran deal faces major delays, or a disruption materializes in Libya, Nigeria, or elsewhere, OPEC+ cohesion would likely improve and oil markets could become uncomfortably tight," Platts Analytics continued.

Typically, shipowners have favored the bullish case. "There's such optimism right now, that owners aren't scrapping ships. Everyone knows it's coming, but no one knows when," a shipowner said. "There's an expression: 'Its darkest before the dawn', so I think that's where we are right now. I think we're max two months away from recovery. I can't see us in this same situation two months from now."

However, this sustained recovery is not expected until Q4 2021, or the end of Q3 2021 at the earliest, sources said. Platts Analytics forecast in their latest Freight Market Outlook that the cost of chartering an Aframax for a 70,000 mt USGC-UKC run will average w75, or $13.61/mt in August 2021, and will rebound to w117, or $21.17/mt in October of the same year.

Despite a stable, low freight forecast for Q3 2021, the market looks to an active hurricane season as a factor which may provide short-term spikes in Aframax and Panamax rates by delaying port operations. The National Oceanic and Atmospheric Administration expects three to five major hurricanes and 13 to 20 named storms will manifest in the Atlantic Basin during 2021's hurricane season.