New York—As countries push their vaccination efforts against COVID-19, clean tanker shipowners are hopeful that petroleum product demand could pick up in the second quarter and breathe life into spot tanker markets on both sides of the Atlantic Basin.
A shift toward an owner's market looks far off going into the second quarter, with global product demand still low and many regions still under various states of lockdown. Low refinery utilization and rising diesel prices in the US Gulf Coast sunk arbitrage opportunities further into negative returns in early March, closing trade lanes and keeping tanker earnings near break-even levels in both the Americas and Continental markets.The US Energy Information Administration reported USGC refinery utilization at 70.7% in the week ended March 12, having increased 73% from historic lows caused by extreme cold weather, which knocked out over 5 million b/d of refining capacity in the week ended Feb. 19.
Ultra low sulfur diesel stocks fell to an over 10-month low in the week ended March 5, EIA data showed, and low refinery utilization in the region disrupted typical trade flows of its ULSD to the US Atlantic Coast on the Colonial Pipeline. This prompted increased imports of distillates into the USAC from Europe and Brazil, areas which historically import barrels from the USGC.
The ULSD arbitrage from the US Gulf Coast to Northwest Europe has been mostly closed since December 2018, with spot tradeflows decreasing as more diesel barrels were exported to Latin America. Negative returns on the USGC-Northwest Europe ULSD arbitrage intensified during the pandemic amid high stocks and demand destruction on the Continent markets, and even reversed as barrels flowed from the Continent to the USAC in November and December 2020 and in pockets in 2021.
"Arb-wise from Europe to [the USAC], looking forward on blender margins, they are all open until August," a shipbroker said.
USGC loading region banks on Latin American demand uptickClean tanker owners in the Americas felt the negative effects of the closed trans-Atlantic arbitrage, with Latin America having become the key import region of distillates from the USGC. While product demand did not decline in South America as dramatically as in Europe due to less severe lockdown measures, freight for MRs loading on the USGC remained low in Q1 amid a lack of spot cargoes.
Exports from the USGC will depend on increased refinery utilization in Q2, which will depend on maintenance schedules. S&P Global Platts Analytics estimated that 6 million b/d of USGC refining capacity was offline in the week ended March 19.
Long-haul voyages to attract larger tonnageGoing into the second quarter, a historically weaker market on the Continent and Americas markets, owners are keen to take advantage of long-haul trade flows that could generate a top-down benefit for all clean tanker classes. Rising bunker prices and closed arbitrages have pressured daily tanker earnings, but easing pandemic restrictions could provide opportunity for larger ships West of Suez to capture benefits from the strengthening Asian market.
In the first half of Q1, Long Range tanker owners were hesitant to take East-bound voyages and leave the Continent market; however; higher rates in Asia could raise prospects for backhaul shipments loading there.
Tight supply pushed East of Suez LR1 freight in mid-March to the highest levels observed in 2021 and more ships have delayed their return to the Persian Gulf, causing tightness in the region as fixing activity increased out of the Far East. Should this level of activity continue, shipowners could be willing to uproot more LR tonnage away from West of Suez markets to explore Asian load options, and subsequently alleviate vessel oversupply in the West.
A 30% increase in Rotterdam 0.5%S bunker costs in Q1 will likely prompt owners to hold out for higher rates before ballasting to stronger regions, however. The shaky naphtha arbitrage for east-west shipments could spell more of a stalemate in expectations between shipowners and charterers.
Rotterdam 0.5%S marine bunker fuel was assessed at an 11-month high of $508/mt on Feb. 25, though in the wake of the increase clean freight markets only made periodic upswings in Q1. Rising bunker prices weighed heavily on shipowners in the Americas as well, with Houston ex-wharf 0.5%S bunker fuel reaching a 14-month high of $527/mt on March 11.
Higher bunker rates placed downward pressure on trans-Atlantic journeys in a period when adverse weather conditions forced shipowners to steam at slower speeds, burning more bunker fuel to travel more days at sea. Unrelenting bunker prices due to continued OPEC+ production cuts have pushed many shipowner earnings into the red, and going forward shipowners are banking on alleviating costs in Q2 as COVID-19 restrictions ease.
"Even when Worldscale indications on paper look moderately healthy, the pinch of bunker costs has in fact reduced our earnings significantly," a shipowner said.
