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Viewpoint: European clean tanker oversupply to ease

21 Dec 2017 15:29 GMT
Viewpoint: European clean tanker oversupply to ease

London, 21 December (Argus) — Lower oil product inventories and moderated fleet growth will support clean tanker rates in 2018, as increased activity on long-haul shipping routes adds to Long Range (LR) tanker demand, while the Medium Range (MR) segment benefits from steady activity in the Atlantic basin.

Product stocks fell across the OECD last year, nearing the 2012-16 average in September, according to the IEA. With stockpiles depleting, shipping demand should increase next year as regional imbalances spur seaborne product trade.

Independently held gasoil stocks in the Amsterdam-Rotterdam-Antwerp (ARA) region were 1.95mn t as of 23 November, according to consultancy PJK, down 27.6pc compared to the same week last year. And stocks of gasoline in the US east coast region, a key destination for European gasoline exports, have also fallen this year. Regional stocks were 6.6pc lower year on year in November at 57.5mn bl, according to US Energy Information Administration (EIA) data.

While demand growth will taper off next year, according to IEA estimates, fleet expansion — in terms of vessels and not accounting for scrapping — is set to ease to 4-5pc in 2018, down from around 5-6pc in 2017.

The IEA forecasts oil demand growth of 1.3mn b/d in the final quarter of 2017, down from 1.5mn b/d in the same quarter 2016. In 2018, demand growth will decline in January-March 2018 to 1.2mn b/d, and again in April-June to 800,000 b/d. This compares with growth of 1.2mn b/d and 2.2mn b/d over the same two quarters in 2017.

Growth across the main clean tanker segments will also be more evenly distributed, with the Long Range 1 (LR1), Long Range 2 (LR2) and Medium Range (MR) segments all expanding by around 4-6pc, according to shipbroker estimates. In 2017, the LR2 fleet grew by much as 16pc on the year, in terms of vessels.

But newbuild crude tankers deliveries could add additional clean tanker capacity next year. Over 50 newbuild very large crude carriers (VLCCs) and more than 40 Suezmax tankers —capable of carrying cargoes of up to 280,000t and 150,000t respectively — will hit the waters in 2018. In 2017, several crude tanker newbuilds were chartered to load clean product as they left Asian shipyards, reducing the number of cargoes available to pure-play clean tankers. Such loadings, while rare, are likely to continue to in 2018, and continue to weigh on LR1 and LR2 rates.

Rates for MRs operating west of Suez are, in large part, determined by the Atlantic basin market. Much of the region's activity is driven by demand for gasoline shipped on the front-haul Europe-US Atlantic coast route and on diesel carried on the back-haul journey from the US Gulf coast to Europe.

Latin America has also increasingly attracted tankers delivering product cargoes from the US Gulf and Europe, while west Africa is a common destination for ships loading gasoline and gasoil at European ports.

US gasoline demand largely met or exceeded 2016 levels in 2017, according to the EIA, but dipped in September "possibly reflecting a small impact from [hurricanes Harvey and Irma]". Continued strong gasoline demand in the US next year will provide steady employment for MR vessels active on the transatlantic route, while lighter US stocks should also present arbitrage-driven opportunities. The average rate on the UK continent to US east coast route was up by 4.5pc in January-July 2017 to $16.28/t.

On the backhaul route, US Gulf distillate exports to Europe were around 15pc lower year on year over January-July 2017 averaging 280,000 b/d, according to the EIA, amid increased competition from Russian, Middle Eastern and Asian refiners. Rates from the US Gulf to Europe averaged $12.15/t in January-July, down by 3pc from the same period in 2016.

Exports subsequently rose rapidly in July to reach 462,000 b/d. While US-Europe distillate trade eased in the first half of 2017, exports to Latin America were on average 120,000 b/d higher on the year during the same period, more than making up for the 42,000 b/d shortfall in Europe-bound exports.

With European stocks decreasing, the region should continue to attract diesel cargoes from the US Gulf next year. And a cold US Atlantic coast winter could prompt arbitrage gasoil shipments from Europe to the US, according to independent shipping analyst Court Smith.

East coast US distillate fuel oil stocks averaged 12.6mn bl in November, 16.3pc lower than the same month last year. The arrival of a "reverse" distillates arbitrage would further tighten the Europe-US MR market, while robust US Gulf exports of gasoline and diesel continue to offer employment for tankers returning from transatlantic deliveries.

Firmer Asian markets could also lend support to MR markets year. Strong refinery throughput growth in China helped to support regional MR rates in 2017, with the Argus 35,000t Korea-Singapore assessment increasing by 47.5pc over October-November to average $423,140 lumpsum.

Increased Chinese exports to the Americas in the wake of Hurricane Harvey, as US Gulf coast refinery disruptions raised regional imports. While Asia-US shipping activity is limited at present, an uptick in Asia-Americas shipping activity would provide significant MR tonne-mile demand compared with the relatively short cross-Americas trips, Smith said.

LR markets struggled to absorb an influx of newbuilds in 2017, as demand fell short of burgeoning supply in the first half of the year. Rates in the Mideast Gulf-Japan market fell by 2.6pc to $19.04/t in the third quarter for LR1 tankers and by 3.8pc to 16.90/t in the LR2 segment. But increased Asia-bound naphtha shipping activity over October-November boosted tonne-mile demand, causing the price of LR1 and LR2 rates to increase on the year by 20.7pc to $18.81/t and 33.8pc to $18.30/t respectively, in $/t terms, on the route.

Shutdowns at Hellenic's Elefsis plant, Total's Leuna facility and Shell's 420,000 b/d Pernis refinery contributed to European stock draws and a corresponding rise in Europe-bound shipments the second half 2017. This increased demand was met in part by shipments from east of Suez refiners, which have steadily expanded their output capacity in recent years. In its latest World Energy Outlook the IEA said that the Middle East is set to become the leading product export region by 2020.

With northern Europe stocks lower, imports from east of Suez destinations will provide steady work for the expanded LR fleet as winter progresses.

And in Europe an uptick in Asia-bound naphtha cargoes could increase fleet utilisation. In the aftermath of Hurricane Harvey naphtha west-east arbitrage economics improved against LPG, which competes as a feedstock in Asia-Pacific. Planned refinery maintenance in Middle East next year — including turnarounds at the 400,000 b/d Yanbu and the 305,000 b/d Jubail refineries — could see Asian petrochemical plants source more product from European locations, which would in turn lift LR fleet utilisation as more ships are booked on the long-haul route.

Next year shipowners will take advantage of lighter fleet growth and reduced stock levels — which will lead to regional supply imbalances — to push $/t chartering rates higher. But bunker fuel costs — which were around 40pc higher year on year in November — could cap or even reverse gains, meaning shipowners will need to ensure rates keep pace with rising operating costs to maintain profits. If unsuccessful, shipowners may be forced look to scrapping as a means of reining in supply and increasing rates.