Viewpoint: Product tankers to get European diesel boost

EU sanctions on Russian oil products will create unprecedented market dynamics in 2023, which could boost European clean tanker rates.

The EU sanctioning all Russian oil products from February 2023, cutting off European access to Russian diesel and naphtha will force the oil products tanker market to evolve, and likely result in significant gains in tonne-miles — a measure of how far freight travels. This will support freight rates for the larger product tanker sizes, but will leave the smaller segments struggling for cargoes.

The biggest impact will be on the diesel market as traditionally Europe imports 30-50pc of its diesel from Russia through the 30,000t Baltic to UK Continent Handysize route and the Black Sea to Mediterranean route. Sanctions will close the routes and leave Handysizes with almost no alternatives, leading to a possible swan dive in rates in cross-UK Continent and cross-Mediterranean markets. These changes are likely to occur from 1 January as most European importer's long-term supply contracts conclude at the end of December.

This will mean Europe has to find an additional 3mn t of diesel every month — its average imports from the Russian Baltic (around two-thirds of the total) and Black Sea in 2022 — and it will have to look much further afield to find a replacement. The most obvious sources are the Mideast Gulf and India, which use the larger Long Range (LR) ships to move diesel into Europe. But although imports from Mideast Gulf and India in September were considerably higher year on year at 3mn t, October's and November's levels dropped back in line with 2021's average of around 2.4mn. Both measures are well short of the goal of 3mn t.

European buyers have not yet fully shifted to Mideast Gulf diesel as Russia is still supplying some diesel under long-term deals. But there are questions as to whether the Mideast Gulf and India will be able to supply the required 3mn t in 2023. If not, Europe will likely have to look as far as China and other east Asian origins as most US Gulf production is already tied up in supply contracts with Latin America. Either way, LR ships are likely to see an significant increase in diesel tonne-miles.

At least one LR2 has sailed between China and Europe but it is a potentially expensive trade — and a last resort for importers. The most likely alternative is that European importers will use newly-built VLCCs in the first quarter to ship Chinese-produced diesel into Europe, as well as west Africa.

The first VLCCs have already been booked — Unipec on the G Hope for $7mn and an unknown charterer on the Helios for $7.5mn — and there will likely be more in the first quarter of 2023. This trade will only be in the early part of the year as that is when new VLCCs typically hit the water.

The increase in diesel flows from China to Europe will likely lead to higher rates for 90,000t and 60,000t LR ships but perhaps not the significant gains that market participants were forecasting earlier in this year. Traditionally, the prime driver of LR rates is naphtha rather than diesel, and mainly involves LR2s and LR1s supplying material from the Mideast Gulf and Europe to east Asia.

East Asian naphtha demand is set to be lower in 2023. Regular buyers of naphtha in the region, including in South Korea, Japan, Taiwan and Southeast Asia are contemplating buying lower term volumes as they had to keep their crackers running earlier this year to fulfil term contract obligations, despite very weak margins.

In addition to this, a number of Chinese petrochemical producers have indicated in their recent results that they are very close to insolvency because Covid lockdowns suppressed consumption, likely adding further pressure to naphtha demand. With this key driver of the LR market set for a lacklustre 2023, there will be much more capacity for diesel cargoes between the Mideast Gulf/India and the UK Continent — potentially keeping freight rates below what participants previously expected.

By John Ollett