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Singapore — The East of Suez Long Range II tanker rate jumped significantly Tuesday amid tight supply, as charterers made a beeline to cover their requirements, fearing further tightening of supply as more gasoil moves to Europe ahead of the implementation of the new sulfur emission norms for marine fuels from January.

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Previously, VLCC newbuilds were being used to move gasoil on their first voyage, thereby eating into demand for LR2s, said one source with a clean tanker owner. However, a spurt in VLCC rates to levels not seen since 1990 has resulted in a situation where owners are ballasting their super tankers to the Persian Gulf to pick up crude. This has pushed up demand for LR2s.

LR2 rates to move naphtha from the Middle East to North Asia have gone up by more than 100 Worldscale points in under 24 hours, according to fixtures collated by S&P Global Platts. For Europe-bound voyages from the Persian Gulf, to move gasoil and jetfuel, LR2 rates are up by $1 million on the day, Platts data showed.

LR2 owners, which had been struggling to garner $10,000 daily earlier this year, are now earning more than $80,000/day on the Persian Gulf-Japan route.

Fearing a further rise in rates, charterers have started seeking ships earlier than usual. As a result, demand has outstripped supply. "The LR2s are fast disappearing from the market," the same source said. Charterers want to split cargoes and take MRs, he added. But this is no longer possible because MR rates have shot up as well.

What started as a rally in the rates of super tankers that carry crude has percolated down to the small product tanker segment.

Further, demand to move naphtha from the Middle East and the West Coast of India to North Asia implies that LR1s, LR2s and MRs are all expected to be supported for the rest of the week, sources said, adding that uncertainty looms on the short-term freight outlook.

"Everything is on fire," said one chartering executive with a global commodities trading company. However, he cautioned that such a rapid rise in rates is something that cannot be sustained. "It is a bubble, which will burst, but it isn't known when," the executive said.

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

--Edited by James Leech, james.leech@spglobal.com