Aframax tonnage has been tight in the Atlantic basin thanks to heavy demand for fuel oil loadings in Europe, but demand grew even more this past week as charterers rushed to secure vessels for US loadings in response to Texas’ unusual winter weather.
In this episode of The Crude Report, Americas Freight editor Nicholas Watt and freight reporter Liz Ramanand discuss the market's recent 30% surge in rates and the effect the spot market is having on futures prices.
Nicholas Watt: Hello and welcome to this special podcast episode that will be on both The Weight of Freight and The Crude Report Argus podcast series. My name is Nicholas Watt, the freight editor for the Americas. I'm joined here by my colleague Elizabeth Ramanand and we'll be discussing freight costs for US crude shipments into Europe, a key market for excess US crude.
But before we get too deeply into freight costs on the route, I want to touch on one of the hot topics in freight lately, record high container ship freight rates. Liz, is this affecting the cost of transportation for US crude into Europe?
Liz Ramanand: Thanks, Nick. In short, no. Container ships and tanker ships are quite different. Container ships are cargo ships that carry all of their product in large containers, so it can't carry the types of cargos that oil tankers can carry, and vice versa. So they are separate markets. Strong demand for container ships in the last year, combined with higher than normal port delays, have caused rates for those ships to climb to multi-year highs. Some may think container-ship port delays are slowing tanker traffic, but that's not really the case either because they use different docks. So, for instance, the port delays in California are having little-to-no effect on the movement of tankers there. The shortage of available container ships can impact other commodity markets, such as certain scrap items transported in containers, but not crude or crude freight rates.
Nicholas: That's good to know, Liz. That'll probably let some oil shippers rest easy knowing that the sky-high container ship rates likely won't carry over into crude freight pricing. Now that we've established there's little relationship between containers and US crude to Europe freight costs, how much does it cost to ship US crude to Europe?
Liz: So far, the cost this year has ranged from about $11-$18/t, or about $1.50-$2.50/bl on Aframax tankers, which can carry about 700,000 bls. Actually, this past week, rates have risen to the top end of that range, partly because of the weather-driven power outages in Texas.
Source: Argus Freight
Nicholas: Oh, really? Can you explain why that happened? How did the power outages in Texas boost Aframax rates?
Liz: Sure. As power outages shut in crude supply and port delays mounted, charterers rushed to secure Aframaxes for their outgoing cargos amid all of the uncertainty. Ship owners were able to push for higher freight rates, as demand increased. Rates rose by 30% on the route in the space of just a couple of days. But that wasn't the only factor.
Nicholas: Oh, okay. So, what were the other factors that helped push the rates higher?
Liz: Even prior to the US freezing temperatures and outages, Aframax tonnage was tight because of heavy demand for fuel-oil loadings in Europe, where the rates hit a 9-month high for Mediterranean and Black Sea loadings. And it thinned available supply in the Atlantic basin. So, once the outages hit Texas, the Aframax market was already primed to rise. So, that's what really spurred this rally.
Nicholas: Very interesting. So, it was a combination of factors leading to the recent gains in US to Europe freight costs? It's an increasingly rare thing to see tanker rates rise since the market is so depressed compared to a year ago. Even despite these increases, US Gulf-to-Europe Aframax rates are still about half of where they were at this point last year when a combination of US sanctions on Chinese shipping company Cosco and weather delays in the region tightened tonnage supply. Would you agree that this jump we're seeing right now in Aframax rates isn't likely to last?
Liz: That's exactly right. Given the global surplus of oil tankers, the current spike is likely to be short-lived as more tankers become available to fill in the shortfall. Charterers will then be able to negotiate freight down to lower levels than where it is now. Generally speaking, rates across all dirty tanker vessel classes, from Panamaxes up to VLCCs in the US Gulf coast and elsewhere have been depressed because tanker supply across all segments have been weak in demand.
Nicholas: Have you seen a shift in what types of vessels are taking US crude into Europe?
Liz: The main shift I've seen is that Aframaxes have become even more dominant as the main type of vessel taking crude from US to Europe. There are a few Suezmaxes sprinkled in here and there too, and for VLCC trips on that route have become less common. The last time a VLCC went from the US to Europe, Houston to Rotterdam, was back in September 2020. It's clear that charterers value the versatility of the medium-sized Aframaxes, which can load directly at all major US crude outlets in the Gulf coast and have more discharge options in Europe than larger vessels.
Nicholas: Speaking of changes, there has also been a major change in the US political scene with Joe Biden taking office. How might this change in administrations affect US crude freight rates?
Liz: Policies of the new administration can impact freight rates in a variety of ways. First, looking at sanctions. The election of Biden increased expectations that sanctions on imposed oil-producing Venezuela and Iran will be lifted or, at least, eased. As far as Aframaxes are concerned, Venezuela is the more important one to consider. A change in policies when it comes to Venezuela could significantly alter the regional Aframax market. It could potentially bring back Venezuela-to-US crude shipments, which, prior to sanctions on their state-owned oil company PdV in 2017 were carried primarily on Aframaxes.
Before the sanctions, Venezuela was one of the US top crude suppliers. US Gulf refiners are geared towards running heavier crude grades, such as the grades that come out of Venezuela. Once that flow stopped, total Aframax demand in the region dropped, but if that flow returns, then it would boost the Aframax market, as more of these vessels would be needed in the region to carry Venezuelan crude to US Gulf refiners.
Nicholas: Is there any evidence that Biden will change the US approach to Venezuela or, alternatively, stay the course?
Liz: It's still pretty early but, for right now, it doesn't seem that the Biden administration will be negotiating with Venezuela's president Nicolas Maduro anytime soon. In early February, the State Department spokesperson Ned Price said in a press briefing that he doesn't expect the administration to engage directly with Maduro. But the Biden administration has also said it's considering ways to provide humanitarian aid to the Venezuelan people, which could be a rationale behind using some oil-related sanctions.
Nicholas: So it's a wait-and-see situation with Venezuela? One of the first actions by Biden was to revoke the license for the Keystone XL pipeline, which would've carried additional Canadian crude down to US Gulf refiners. I've seen reports that a Keystone XL cancellation could actually boost Aframax demand down the line. Do you agree with that? Could you explain how that would work?
Liz: It's an interesting point. A Keystone XL cancellation could mean an increase in Aframax loading demand on Canada's west coast. Here's the lowdown. Canadian oil producers are now turning their focus to the Trans Mountain Pipeline Expansion project which would provide an outlet for excess Canadian crude on the country's Pacific coast to a terminal at Burnaby near Vancouver. Due to draft restrictions at Burnaby, Aframaxes would be the vessel of choice for that terminal. That extra crude could then go on to tankers to the US West coast and Asia.
Nicholas: And when is this expansion expected to be completed? And also, do we have any idea how much extra Aframax demand it would create?
Liz: Well, it's about a quarter of a way done and it's expected to start up at the end of 2022 with a capacity of 890,000 b/d. According to a report by Alphatanker, if the Trans Mountain Pipeline runs that capacity, there could be about 40 fixtures from the terminal per month, raising Aframax ton-mile demand. That increase in demand for the vessel in the future could put some upward pressure on the Aframax market globally, and, therefore, the US Gulf Coast-to-Europe rates.
Nicholas: Okay, so both of these political developments appear to have the potential to put some upward pressure on US Gulf-to-Europe freight costs. Do you expect rates on the route to rebound like to the highs that we saw back in 2020 when floating storage demand boosted the tanker market?
Liz: It's unlikely to happen this year or even next year because tonnage surplus will continue to weigh on the tanker market. This is on top of weaker oil demand in the global economy and Opec production restraint. Some market participants I've spoken to believe that there will be momentary spikes expected throughout the first half of 2021, for instance, what we're seeing now on the US Gulf coast. Some sources also think freight won't recover from lows until the second half of the year.
Tanker demand is highly correlated to global oil demand, which, in 2021, is expected to increase by 5.5mn b/d year over year to 97.2mn b/d. But it's still below 2019's 101.1mn b/d. This is according to the International Energy Agency.
Nicholas: And what if oil demand rebounds more quickly? What could that mean for freight?
Liz: That's a good point. There's a chance that oil demand rebounds faster than expected as people become more comfortable with travel, as they get vaccinated. If that happens, then it would put some upward pressure on freight rates. But it probably won't be enough to cancel out all the tonnage surplus we currently have in the market.
With all of this being said, there is some expectation that the US Gulf coast-to-Europe Aframax rates will increase, if you look at futures pricing on this route. This month, Argus has just launched future pricing assessments for the US Gulf coast-to-Europe Aframax shipments. Nick, could you talk a little bit about what we're seeing in the US Gulf coast-to-Europe futures market?
Source: Argus Freight
Nicholas: Sure. Yes, indeed, Argus Freight now publishes its first freight futures price assessments, and it is for the front 3-month contracts on this route. In the week ending 19 February, the Texas power outages, which boosted the spot market, also raised futures prices, or FFA prices, for the February, March, and April contracts. On Thursday, February 18th, when the spot market surged to WS110, those contracts were up to WS84, WS88, and WS82 respectively, roughly a 10% increase in just a single day. So essentially the market thinks that Aframax rates on this route, while they will be below the current spot price, will peak in March before declining in April. This speaks to the fact that the tanker market is vastly oversupplied with tonnage.
Liz: That's really interesting. And can you also elaborate a bit more on what an FFA actually is?
Nicholas: An FFA is short for "forward freight agreement." It is a cash-settled derivatives contract that market players who are exposed to physical freight costs can use to hedge that exposure, so that's primarily ship owners and charterers that are in that market. Ship owners or ship operators will sell FFAs, and players on the chartering side will buy them. One of the values of FFAs is that they represent what the market expects freight rates to be on a certain route in the future. Such numbers allow oil traders, including US crude exporters, to get a more accurate idea of what the cost of transportation will be, not on a ship that's charted right now but on a ship that will be chartered months from now. These US Gulf-to-Europe futures prices are now available in Argus Freight.
Well, that just about wraps up our segment for the day, Liz. Thank you very much for joining me and sharing your market insight. And thanks to everyone who was listening, and until next time.