CLEAN TANKER QUARTERLY: Americas freight wealth depends on availability of products, ballasts
A plethora of rods increases MR freight by 112% to 260% since February 23
Tonnage compression firmly closes diesel arb to Europe at minus $15.70/bbl
$8 to $11/bbl Steep ULSD offset prompts month-end repair frenzy
USGC ULSD stocks at seven-year low in March
The verdict is on how well second-quarter U.S. clean tanker markets can sustain the pecking windfall that has pushed freight to heights not seen since the third decade of April 2020, when pandemic-related global lockdowns caused strong contango in the oil markets and put more than 200 million barrels of crude and products in floating storage, occupying about 5% of the world tanker fleet.
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Currently, a shortage of local diesel supply in the Caribbean and South America amid increased demand for power generation, reduced refinery utilization rates and increased demand for diesel during the harvests in Argentina and Brazil was seen as an incentive for the charterer’s strong survey, which quickly depleted Average Opening Tonnage Tankers on the Gulf Coast of the United States. Tonnage compression has caused some charterers to increase their rods by 38,000 tons to load them onto Long Range 1 tankers, which typically carry cargoes of 60,000 tons.
The onset of the fixing bonanza, which coincided with Russia’s February 24 invasion of Ukraine, sent benchmark spot rates for medium-range clean tankers on the U.S. Gulf Coast up 180% to the Caribbean, 170% to Brazil, 260% to the UK mainland and 112% to Chile between February 23 and April 6, according to data from S&P Global Commodity Insights.
“To be honest, it’s hard to see this coming to an end; I don’t see where the relief can come from,” said one shipowner.
“I think it’s a tonnage squeeze,” said a second shipowner, noting that skyrocketing freight rates had reignited diesel arbitrage on the USGC’s return route to the United States. Europe and had helped raise international product prices above South American domestic market levels.
Diesel arb tightly closed
S&P Global Commodity Insights analysis showed diesel arbitrage opened on March 7 at $1.38/bbl for the first time since November 27, 2018, as European diesel importers sought to replace barrels of self-sanctioned Russian products in Europe. Russia exported 1.1 million b/d of product and 820,000 b/d of refinery feedstock from the Baltic and Black Seas. According to S&P Global analysis, 63% of Russia’s own product exports went to North West Europe and 16% to the Mediterranean in 2021, with 90% of trade dependent on medium-range tankers. While USGC ULSD flows to Europe ran on open arbitrage from March 7-30, the arb has been firmly closed since to be quoted at minus $15.70/b based on data from the April 5.
Either way, charterers with downstream assets on either side of the Atlantic, such as international refiner and distributor Valero, have reserved tankers to cover the diesel rods. Petrochemical companies Dow and Ineos also contributed to the flow of ships across the Atlantic, as they carried USGC naphtha cargoes to their downstream European assets, while east-west naphtha arbitrage appears to be a constant challenge.
“Until Europe can figure it out and the barrels sit east, the only place that saves the world is the USGC – it’s the only outlet,” one charterer said. “It’s crazy the rates we’re seeing, but it’s so tight. Shipments aren’t stopping anytime soon. It’s a big sting right now, but charterers will be prepared for a pick-up later. “
Offset stimulates fixation at the end of the month
In the Americas, the recent month-end fixing frenzy was spurred by a large pullback in NYMEX ultra-low sulfur diesel futures, with April ULSD swaps trading $8.1/ b at $11.7/b above the May contract over the past decade. Of March. Traders tried to delay contract rollover by fixing cargoes as late as possible, forcing charterers to rush into an already primed market with incredibly tight tonnage against a plethora of USGC-laden cargoes to cover first to the Caribbean, then to destinations in the east. and the west coasts of South America as well as to sports across the Atlantic. Given that commodity markets continue to pull back sharply, with the frontline May/June ULSD swap spread quoted at $7.50/bbl at market close on April 6, the recent past could repeat itself. and support the recurrence of a fixation frenzy at the end of the month.
Ballasts to the rescue
While most shipowners appeared to be chasing the dollar at present, later in the second quarter a good number of ballasters could cap the rise in the US freight market.
“I think some European ballast will come here at some point, which could create some pressure, but the cargo still seems to be flowing,” said a third owner.
With the USGC market currently the most expensive region in the world, owners are inclined to think seriously about repositioning their fleets by weighing the attraction of diesel from East Suez to Europe against the flows of the USGC.
“There should be more demand for barrels of US Gulf Coast products as we are now starting to see the effects of the Russian-Ukrainian war,” said a fourth shipowner.
Product availability on the USGC and the number of ballasted vessels in the region will determine whether this securing bargain can sustain current rates.
ULSD inventories on the USGC stood at 104.5 million barrels the week ended April 1 and a March average of 103.9 million barrels, the lowest onshore inventories since 2014, according to latest data from the Energy Information Administration.