NWE clean tanker rates rise despite Omicron concerns

Clean tanker rates in northern Europe have risen substantially since — and in some cases because of — the emergence of the new Covid-19 Omicron variant in the region, although a reduction in European refinery production may yet weigh on the market in the longer term.

The bellwether UK Continent to US Atlantic coast Medium Range (MR) rate rose to WS165, or $21.27/t, on 1 December, its highest level since 22 March. And the rate for a Handysize ship on the Baltic to UK Continent route hit $14.29/t, the highest since the floating storage boom of spring 2020.

The rise in MR rates is directly linked to Omicron, which has been the major factor in the European gasoline market swinging from tightness in early November to potential oversupply at the end of the month. Gasoline prices fell sharply relative to crude as a result, spurring more export demand as European volumes became more competitive in the US, west Africa and Latin America.

MR tankers are most commonly used for gasoline transport, and 29 MRs were put on subjects on 29 November-1 December from the Baltic and UK Continent regions, at least 15 of those for gasoline cargoes although two have subsequently failed. This compares with 20 vessels on subjects on 24-26 November and just four on 17-19 November.

The jump in Handysize rates is linked to other factors, particularly low Rhine water levels which are creating logistical problems getting diesel from the Amsterdam-Rotterdam-Antwerp (ARA) region to inland markets. This has buoyed cross-UK Continent trade, with Germany importing more diesel to its northern ports in response to the steep rise in the cost of barge imports on the Rhine. Vortexa data show the country imported 550,000t of diesel and gasoil on Handysize tankers in November, up from just 238,000t in October and the most since July.

Clean Handysize rates may also have received support from the fuel oil market, with rates for Handysize ships operating in the dirty tanker segment considerably higher than in the clean market, in Worldscale terms. This gives shipowners an option to switch vessels operating in the clean market to transport fuel oil instead — provided the higher rates on offer can offset the future clean-up costs — and can provide more competition for Handysize tankers in the region. The European fuel oil market is tight, particularly in light of solid demand for exports to Asia-Pacific, and this provides a supportive environment for dirty Handysize tanker demand on the Baltic to UK Continent route.

Long-term view still uncertain

In the longer term, Omicron-related restrictions may still weigh on demand for clean product transportation. The recent collapse in European transport fuel margins has paved the way for run cuts at European refineries, according to traders, with some estimating a reduction in throughput as high as 10pc is on the cards. This could mean less product available for export, while tighter measures could also limit demand in importing countries.

Vortexa data show that tonne-mile demand from the UK Continent for MR and Long Range 1 (LR1) tankers — which both operate on gasoline routes — fell by 15pc on the year in the first half of 2020 when global lockdowns were at their tightest. Tonne-miles had recovered above pre-pandemic levels by the first half of this year but could come under renewed pressure if more countries reimpose measures to combat the spread of the new variant. Furthermore, a slowdown in diesel consumption in Europe would likely cut German demand for Handysize imports, particularly as and when congestion in the Rhine eases.

Disruption to global trade flows can impact tanker markets in unexpected ways. For example, the period from March to May last year saw historically higher tanker rates, despite low tonne-mile demand, with many vessels either used for floating storage or delayed by port restrictions. But fundamentally, reduced European refinery production and transport fuel demand are not likely to be seen as a positive by the region's clean tanker owners.

By Will Collins and John Ollett