Weight of Freight: Southeast Asian Aframax rates – Are higher levels here to stay?

Author Andrew Khaw, Editor, Asia Freight

Southeast Asian Aframax tanker freight rates have been on a steady climb since end-June, following firm demand for vessels on the inter-region short-haul trades. But could the fall in crude prices and subsequently fuel costs, put a halt to the upward trend? Or are there still supporting factors that could lift rates higher?

Lower crude prices, higher freight rates?

Recession fears weighed on crude prices throughout July. Manufacturing activity has been slowing in the US and European countries, while central banks have been raising interest rates to tame inflation. Along with the reimposition of Covid-19 restrictions in major crude consumer China, these factors reduced crude demand expectations. Resilient Russian oil production and the resumption of Libyan crude exports in the second half of July bolstered the supply outlook and put additional pressure on crude prices.

The Ice front-month Brent contract has fallen by 22.8pc to $94.46/bl on 5 August from $116.02/bl on 30 June. 

But freight rates for 80,000t shipments from southeast Asia to east coast of Australia and from Indonesia to Japan have risen by about 19.5pc to $36.36/t and $28.77/t respectively to a 30-month high on 5 August, from $30.44/t and $24.08/t on 30 June respectively.

Southeast Asia to east coast Australia and Indonesia to Japan rates and Ice front month Brent prices

So what caused these rates to diverge? One reason could be the different trade windows for crude and vessels. Crude sales for the July window had started in late-May, with Malaysian light sweet Labuan crude due to load in July sold on the week of 25 May to a southeast Asian refiner at a premium of around $12/bl to North Sea Dated. This was the highest spot premium for the grade since at least 2009, according to Argus' records.

Lower exports from Australia was one of the main reasons for the bullish sentiment in the Asia-Pacific crude market in late May, as no cargoes of Australian Ichthys condensate were expected to be available in July because of a planned maintenance at the 8.9mn t/yr Ichthys LNG facility. The facility underwent maintenance from 1 July to 5 August.

The high crude prices and expensive arbitrage cargoes coming into Asia-Pacific, including US light sweet WTI crude, could have led Asia-Pacific refiners to turn more towards short-haul sweet regional grades.

Export volumes on Aframax vessels for crude and dirty petroleum products (DPP) for short-haul voyages within the southeast Asia rose by 111,074t to 749,901t for July from an average of 638,827t for the first half of this year, according to vessel departure data from oil analytics firm Vortexa.

Freight rates were further supported by a surge of cargoes which emerged for similar loading dates in July, leading to fierce competition. Some charterers held back at first, taking a wait-and-see approach, a trader said, but this approach can be risky because if other charterers act before they do, then they will have to pay up for what is left.

Projected export volumes for crude and DPP from southeast Asia on longer-haul voyages to Japan, South Korea, China, Australia, and New Zealand on Aframax vessels were higher in August, potentially rising to 1.22mn t in August from 1.04mn t in July and 1.02mn t in June, according to preliminary data for vessel arrivals from Vortexa.

Argus recorded vessel count in the region falling by 52pc to 13 vessels on 29 July over a two-week period, from 27 vessels on 22 July over a similar period.

A matter of perspective

The price of very-low sulphur fuel oil with 0.5pc sulphur in Singapore was at $1,130/t on 30 June, but has since fallen to $728/t on 5 August.

Bunker prices, similar to crude, have been trending lower since June. But the high bunker prices were also a leading factor in high offer levels. Shipowners were encouraged to offer higher rates as some of them had purchased bunkers at over $1,000/t.

Some of these shipowners, which had possibly filled their tanks to full, continued to factor in these expensive bunkers that they had purchased for their subsequent voyages, leading to higher freight rates.

Time charter equivalent rates for non-scrubber 80,000t shipments from southeast Asia to east coast Australia and from Indonesia to Japan reached record highs on 5 August at $49,369/d and $48,483/d, from $20,977/d and $20,870/d on 30 June respectively.

Southeast Asia to east coast Australia and Indonesia to Japan TCE rates and Singapore VLSFO bunker prices

Are current freight levels sustainable?

Yes, in the short term. Freight rates could move even higher as chartering activities and demand remain firm for the end-August loading window.

Export volumes are expected to rise as Malaysia's light sweet Kimanis crude will rise to around 135,000 b/d in August from a planned 97,000 b/d in July, according to the preliminary loading programme.

Tonnage supplies also remain tight enough for some charterers to consider approaching vessels which were still on charter for offers, participant said.

But in the medium- to long-term, freight rates could come under pressure. The risk of recession is real and growing, with the World Bank and IMF now both talking openly of the potential for a protracted downturn through 2023. In a recession scenario that assumes just 1pc global GDP growth in 2023, global oil demand growth would slump to just 400,000 b/d.

Regional imports for short-haul trips within southeast Asia could also move lower, if Asian refining margins come under pressure from increased utilisation rates from China’s independent refiners.

A higher utilisation rate from China would mean more crude imports, but crude sellers have been concerned that the growing volumes of Russian crude diverted away from Europe as a result of sanctions would start to undermine prices in Asia-Pacific.

But there is a silver lining — heavy price discounting has been highly successful in opening up brand new markets, which could lead to higher ton-mile-demand depending on the destination these volumes.

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