Clean tanker demand drop weighs on US Gulf rates

A sharp drop-off in tonne-mile demand for US Gulf coast medium range (MR) clean tankers so far this year has pressured freight rates for the segment to the lowest sustained levels since the start of the Russia-Ukraine war last February.

Demand for US Gulf-loading MR clean tankers has averaged 17.45bn tonne miles per month since 1 January, per Vortexa data. During the same period the US Gulf coast-Pozos MR tanker rate has averaged $713,700, down from 2022 averages of 22.92bn tonne miles per month and $955,700, respectively.

One main driver of the drop in demand has been Brazil turning away from USdieselin favor of cheaper Russian supplies. So far this year, Brazil has imported roughly 95,500 b/d of Russian diesel, up from a 2022 average of 1,800 b/d, per Vortexa data. Comparatively, Brazil's diesel imports from the US have fallen to 75,500 b/d from 163,400 b/d.

Gulf export demand has also faced headwinds from a slowdown in exports to west coast Latin America, one of the key long-haul trades out of the region. Shipments of diesel, gasoline, jet fuel and naphtha on the routes have averaged 1.79mn b/d so far this year, down from 2m b/d last year, per Vortexa data.

Moreover, EU importers since the 5 February ban on Russian refined product imports have mainly favored replacement barrels from the Mideast Gulf and India over the US Gulf. This uptick in east of Suez-to-west of Suez flows created a tonnage oversupply in the Atlantic basin, helping push MR earnings there to a discount to those in the Mideast Gulf and Asia. For a US Gulf coast-Pozos MR shipment $/d earnings have averaged $16,300/d this year, compared with $30,700/d for a Mideast Gulf-Japan MR shipment and $36,200/d for a South Korea-US west coast Shipment, per Argus data.

Market participants initially blamed the Gulf's slow start to the year on refinery maintenance, which was pushed forward following severe winter weather in late December. US Gulf refinery utilization averaged 86.6pc from the last week of 2022 through the second week of March, according to the US Energy Information Administration, but since then has averaged 95.4pc. But the higher runs have not translated to a significant increase in spot export activity because the aforementioned shifts in trade flows have limited demand for US products.

Quiet days are over now?

The persistent lull in the Gulf might be coming to an end if recent trends are any indication. A rush of Mexico- and European-bound shipments this week has tightened up tonnage and put significant upward pressure on the market ahead of Memorial Day weekend, pushing rates to one-month highs.

EU-bound diesel exports out of the Gulf started to pick up earlier this month, as a drawdown of high EU stocks and high US output has widened the transatlantic arbitrage, which remained narrow throughout most of 2022 and the first few months of 2023. US Gulf-to-EU diesel departures have averaged 194,400 b/d in May, up from 32,100 b/d in the first four months of this year, per Vortexa data. If these increased flows are sustained, it would be a major buoy to Gulf rates.

And the increase in Russian products into the Brazilian market, though weighing on Gulf demand and rates in the short term, will ultimately put upward pressure on the global market because the altered, less-efficient flows lead to higher tonne-mile demand and stretch the global fleet.

By Michael Connolly