Higher European demand for US diesel is likely to put upward pressure on Americas clean tanker rates during the second half of this year, as the 5 February EU restrictions on Russian refined product imports forces importers in the region to seek supplies from more-distant origins.
EU imports of Russian diesel have nearly ground to a halt since the start of February, down from a 2022 average of 598,900 b/d, according to Vortexa data. This reduction has coincided with a drop in the bloc’s overall diesel imports, which have averaged 1.68mn b/d since February, down from a 2022 average of 1.88mn b/d. EU countries have not yet been hurt by the absence of Russian imports because the region’s diesel market has been persistently oversupplied over the past two months following a mild winter and high import volumes ahead of the implementation of the 5 February ban.
But the lengthening of voyage times for diesel shipments into Europe has raised the possibility that stocks could tighten quickly because supply will not be able to react as quickly to sudden demand spikes. It takes a tanker about four days to sail from Primorsk, Russia, to Rotterdam, while voyages from replacement exporters in the US Gulf, the Mideast Gulf (Yanbu) and China (Qingdao), take around 17, 13 and 37 days, respectively.
These longer voyages will boost refined product tanker tonne mile demand and be a key driver of upward pressure on freight rates, because less-efficient trade flows work to tie up tonnage supply for longer periods.
The US Gulf coast-Pozos medium range (MR) tanker rate averaged $995,700 lump sum in 2022, peaking at an all-time high of $2.075mn in early August. This compares with a 2022 average of $408,750 and peak of $900,000. The Argus time charter equivalent (TCE) rate on the route, which represents the $/d earnings or loss for a shipowner, averaged roughly $25,000/d in 2022, peaking at $85,000/d. Many shipowners expect that earnings will remain at similarly firm levels this year, with higher tonne-mile demand for shipments into Europe being a key catalyst.
US-Europe flows primed to rebound
The volume of US diesel exports to the EU has waned in recent years, first because of demand loss from the Covid-19 pandemic, and again last year because of Russian and Asian exports into Europe outcompeting exports from the US.
US Gulf coast-to-EU diesel flows averaged 67,000 b/d in 2020-2022, down from 154,250 b/d in 2016-2019, according to the US Energy Information Administration.
But these transatlantic shipments could rebound in the coming months once European stocks get drawn down, and importers in the region start to restock ahead of next winter. Historically, European demand for US diesel imports has been seasonally strong in the summer.
The end of refinery maintenance season in the US Gulf coast in the first quarter has already led to a slight jump. So far in April, US Gulf coast-to-EU diesel departures have averaged 90,300 b/d, up from 22,900 b/d in the first three months of this year.
European importers will face less competition from Latin America for US Gulf diesel if recent trade flow alterations are sustained.
So far this year, Brazil has imported 71,800 b/d of US diesel, down from 161,000 b/d in 2022, according to Vortexa data, when it was the second largest importer of the product behind Mexico. Meanwhile, the country’s imports of Russian diesel have averaged 75,350 b/d so far this year, up from 2,000 b/d in 2022.
Additionally, countries on Latin America’s west coast have also turned away from US Gulf diesel and instead have been importing more from Asia-Pacific and the US west coast.
So far this year, US diesel flows to Latin America’s west coast have averaged 240,340 b/d, down from 333,120 b/d in 2022. Meanwhile, the region’s imports of diesel from the US west coast and Asia-Pacific have averaged 133,110 b/d, up from 87,380 b/d in 2022.