Weak demand for refined products is affecting rates in all European clean tanker segments, and the impact is likely to continue into 2021.
Restrictions aimed at curbing the spread of Covid-19 have weighed heavily on demand for clean products in 2020. Market participants expect European gasoline demand to be 15-20pc lower on the year in November and December, with similar declines moving into next year. And although vaccination programmes have started to be rolled out, it could be several months before this translates into improved demand.
A decline in Handysize rates on northern European routes, spurred by the slide in gasoline demand in western Europe, appears set to continue into 2021. The segment was hit particularly hard by the fallout from Covid-19 in the second half of 2020. Handysize freight rates between the Baltic and UK continent averaged $17.25/t in January-March 2020, jumped higher in April because of a boom in floating storage demand, but settled at an average of just $9.28/t in May-November. Rates for Medium Range (MR) tankers will remain under pressure too, amid a growing surplus of vessels. The oversupply of tankers pushed rates to a four-year low at one point in November.
Charterers are likely to continue switching between tanker sizes in search of a better deal next year. MRs are sometimes used for cross-UK continent voyages, where Handysizes are typically selected. Likewise, an increasing number of Long Range (LR) vessels are being used for transatlantic and west African voyages, which are historically dominated by MRs. LR1 and LR2 vessels carried an average of around 840,000 t/month of clean products from the Amsterdam-Rotterdam-Antwerp (ARA) area to west Africa in July-November 2020, up from 740,000 t/month in January-June, according to Vortexa data. In contrast, MR usage on the route fell slightly.
This competition between MR and LR vessels has weighed on freight rates on routes where volumes have been relatively stable. Clean product shipments between Europe and the US Atlantic coast rose to an average of 1.23mn t/month in May-November from around 990,000 t/month in the first quarter, partly explained by less stringent lockdown measures in the US. But rates for MRs on the route — the dominant vessel class — still fell to $14.75/t on average in May-November from $25.44/t in the first quarter, as MR vessels that were no longer being utilised for west African journeys competed for transatlantic cargoes instead. And with gasoline demand projected to remain under pressure, competition between tanker segments will continue to undermine rates into next year.
Meanwhile, there is little sign of a recurrence of the floating storage boom that swelled clean tanker rates in early 2020. Global oil product floating storage stands at 32.45mn bl — the lowest since March 2020 — according to Vortexa. A collapse in demand or a shift in Opec+ production policy of the magnitude that occurred in the spring, to push floating storage volumes significantly in the other direction, seems unlikely. The unwinding of floating storage has also brought ships back into the market, which will pile further pressure on freight rates in 2021.
Pockets of demand could emerge next year, supporting rates for short periods. An opening of the Europe to US diesel arbitrage window led to a surge in shipments to the US Atlantic coast at the end of this year. Similarly, with Asia's recovery happening at a quicker pace than Europe's, extra-regional trade such as east Asia-bound naphtha shipments could help to support LR tanker rates and ease the pressure on the segment as a whole. But for now, the prolonged impact of the pandemic is set to keep the market under pressure.
