Following a very welcome period of rate hikes due to the tough Winter in the northern hemisphere, the Spring is here now and the product tanker markets are about to settle down again.
Freight rates in all clean tanker segments are getting down to the cash-break-even level again and MR tankers are already there earning only USD 6,199 per day in the current market. With the absence of short term drivers to improve rate levels it becomes important to take a look into the future prospects of the business.
Shipping analyst at BIMCO, Peter Sand, suggests that “supply and demand indicators are both pointing at a market that may return to the depressed levels of 2009 for some time, before the long term balance is restored and rates are brought back to more healthy levels.”
The second and third quarter is traditionally low season for product tanker demand and the use for larger product tankers, primarily LR2, to store products in floating stocks is getting close to a 1-year-low on the back of narrowing gasoil contango, with just 41 vessels reported to be in use for storage.
If you combine this with an overcapacity of tonnage in the market you get a fundamental imbalance between supply and demand that favours charterers as rates head south.
Source: BIMCO & Clarksons
The most important long term driver behind product tanker demand is the building of new refineries far away from the large oil consuming developed countries. As refinery capacity in developed countries has not grown for many years, the import of refined oil products has increased. But recent years have shown that oil consumption is stagnating in developed countries and that is having a dampening effect on product tanker demand. This means that the stronger of the two legs in the “refinery dislocation story” is limping. Meanwhile, the weaker leg, where new demand is rooted in domestic refinery capacity being reduced, is under increased pressure from the greater use of bio fuels.
Combined with the fact that existing refineries are expanding at the same pace as old refineries get closed down, trading on specifications seems to be the driver to look out for in future. There has always been a product tanker demand driven by oil trading caused by differences in prices, which is best exemplified by the Atlantic gasoline arbitrage trade. Trade on specifications is a trade based on differences in sulphur content of the refined products. This means that basically the same products can be transported from A to B and back again because of the difference in sulphur content in the output from the local refineries. Different regional restrictions on fuel specifications means low-sulphur products are imported into North America, Europe and FSU while high-sulphur products are imported into Latin America, Africa, Middle East and Asia Pacific.
“Demand originates from stricter rules on sulphur content in refined oil products consumed in developed countries which cannot be supplied by local old refineries which hesitate to make heavy investments in desulphurisation facilities. This creates a trade where low-sulphur products from modern refineries in the Middle East are imported into US and Europe, while oil products of higher sulphur content go the other way” adds Peter Sand.
The markets may not see consistently healthy levels until the next Winter market arrives, unless floating storage goes through the roof. But more sophisticated trade patterns and changes to existing ones will provide extra ton-miles in coming years to push fleet utilisation and freight rates up once again.
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