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Asia tankers Q3: Iran sanctions lift dirty; clean supply tight

Singapore — A strong Asian tanker market is expected in the fourth quarter with visible signs of a recovery after being under acute supply pressure for most part of the year, participants said.

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In the dirty tanker markets, rates are already close to their highest level this year and the uptrend is expected to gather steam as chartering activity intensifies in Q4.

Regional refineries are expected to ramp up output after the summer maintenance period, said Luigi Bruzzone, a Genoa-based research analyst with Banchero Costa, or Bancosta, a global shipping brokerage and consultancy.

An increase in refinery utilization rate supports the tanker market both ways, pushing up demand for dirty tankers to deliver crude for processing and clean tankers to ship out the products.

"Demand for crude should remain at good levels despite tension in the market," Bruzzone said, referring to the upcoming US sanctions on Iranian oil from November 4.

The rise in demand and increased scrapping activity will offset some of the tanker supply pressure. This year through September, 60 new dirty tankers were delivered with half of them being VLCCs, according to Bancosta's estimate. Another 25 dirty tankers are expected to be delivered in the current quarter. More than 80 dirty tankers have been scrapped so far this year, including 28 VLCCs, it said.

Refinery run rates will be very high during the November-January season and this may support the market, particularly the dirty tankers, said Peter Sand, BIMCO's Copenhagen-based chief shipping analyst.

SHAKY FUNDAMENTALS STILL EXISTS

Both clean and dirty tankers are struggling over poor growth in demand and the slow expansion of fleet does not seem to be of enough help for owners, Sand said.

"There is a steep decline in interest in scrapping and even though freight rates are not as awful as earlier but they are [still] not profitable," Sand said.

Even though hopes are high for the incremental winter demand, it all boils down into kneejerk effects that bring in a slower recovery, he said. As of now, strong demand is supporting the rates. China's crude imports from West Africa are set to hit a seven-year high this month. Chinese refiners have purchased close to 1.71 million b/d of West African crude for October loading.

TRADE WAR MAY RAISE TON-MILE DEMAND

The increase comes as the trade dispute with the US over tariffs prompts China's refiners to find alternative sources of crude, Jo Ringheim, an Oslo-based research analyst with Arctic Securities said in a recent report. West African crude grades are similar in quality to US shale, he said.

According to Arctic Securities, higher crude flows from Saudi Arabia and Russia will drive up activity and Chinese independent refiners are flush with new and bigger import quotas. China is also replacing Iran's volumes with barrels from Brazil and West Africa.

These factors should contribute to a strong fourth quarter for the VLCC and in a typical fashion other segments also stand to benefit as charterers will look for cheaper alternatives, Arctic Securities said in a report.

CHANGING CLEAN PRODUCT TRADE FLOWS

The clean tankers market is benefiting from more flows of gasoil and gasoline from the Middle East and Europe to Australia as these are longer voyages and add to the ton-mile demand.

Ton-mile demand is calculated by multiplying the volume of cargo moved in metric tons by distance traveled in miles. Covering a longer distance implies diminished availability of ships even if the total size of the fleet remains the same, or conversely, it offsets the increase in supply of tonnage.

In addition, delivery of new built ships are slowing down consistently. "This is the third consecutive year of declining deliveries of new ships," said Ralph Leszczynski, Bancosta's Singapore-based director for research.

For MR tankers, deliveries this year are expected to be around 3.2 million dwt, less than half of the volume of new builds in 2015. MR demolitions have reached their highest levels since 2010, said Leszczynski. The MR fleet was growing by around 7% annually in 2015, this year it may be hardly 1%, he said.

A dampener for the product tankers market is the growing trend of new build large dirty tankers loading clean products.

VLCCs are shipping oil products from the Far East into Europe on their maiden voyage, which is quite hurtful for oil product tankers, said BIMCO's Sand.

Rates of LR2s, which had converged with LR1s, have stayed rangebound. On the other hand, LR1 rates have increased. As a result the discount of LR2s to the LR1s has widened again. This has opened up the possibility of charterers shifting towards taking more LR2s for moving naphtha on the Persian Gulf-North Asia routes, sources said.

--Sameer C. Mohindru, sameer.mohindru@spglobal.com

--Vickey Du, vickey.du@spglobal.com

--Edited by Irene Tang, irene.tang@spglobal.com