The outlook for European oil products tanker rates is more buoyant for the coming year, helped by higher refinery runs and oil products demand in Europe and the US, which should gradually rebalance the market.
Refiners will be keen to maximise revenues after a very challenging period post-Covid and are likely to push operating rates as much as possible as long as demand is sufficient to keep crack spreads beneficial. Higher production and demand is likely to result in more cargoes available for intra-Europe or cross-Mediterranean voyages, potentially boosting Handysize freight rates.
European refinery runs reached their highest level since February 2020 in November, with oil products stocks at a near three-year low. Vaccination roll-outs in Europe and elsewhere led to fewer Covid-related restrictions and pushed demand for transport fuels up in the autumn.
But although gasoline demand appears to have held up since the Covid-19 Omicron variant that emerged in December, and product margins over crude have been similarly robust, the pandemic remains a concern. Further restrictions could lower demand and weigh on refinery production — ultimately reducing tanker demand. New measures to curb the spread of Omicron could disrupt trade flows or logistics in a way that tightens clean tanker availability, as happened after the initial outbreak in spring 2020.
So far the Energy Information Administration (EIA) raised its expectations for US gasoline demand in 2022 by 0.5pc, to 9.01mn b/d, compared with its previous outlook. This should support Medium Range (MR) tanker demand on the key UK Continent to US Atlantic coast route, with Europe being a net exporter of gasoline.
Meanwhile, refineries running at higher rates to meet increasing gasoline demand in the US and Europe would result in more naphtha production, potentially pushing domestic pricing down and opening the door for more shipments to east Asia on Long Range (LR) tankers. European naphtha exports to east Asia — a major source of LR tonne miles — have slowed in recent months, with lower refinery production, high demand from the gasoline and petrochemical sectors and lower imports from the US Gulf causing European cracks to soar.
This could be the key to lifting pressure on the clean tanker market, because an oversupply of LRs often weighed on rates in 2021. There are nearly 10pc more LRs trading than in November 2019 as a result of newbuild deliveries and existing Aframax crude tankers cleaning up to trade as Long Range 2 (LR2) because of a lack of demand in the crude market. With fewer long-range naphtha exports for these to carry in recent months, LRs have been seen muscling in on typically MR or Handysize business on some routes, causing supply pressure to cascade down. But a recovery in west-east trade could mitigate this issue.
European MR and Handysize rates have increased sharply in recent weeks — MRs to the US Atlantic coast peaked at $24.49/t on 13 December, the highest since May 2020 — on highergasoline cargo bookings to the US after the emergence of Omicron caused a slump in European prices. Low Rhine water levels limited barge transportation in November and early December, causing a significant increase in Handysize diesel imports into Hamburg.
Although the effects of these were short-lived, some seasonal factors should continue to support rates in the first quarter, such as ice formation in the Baltic Sea that has begun relatively early this year and leads to premiums on freight rates. Weather disruptions are also frequent in the Mediterranean and Black Sea in the first quarter, which also often push freight rates up.
