02-11-2018

Scorpio benefits from clean LR2s entering buoyant Aframax trade

Freight for Long Range 2 clean products tankers has been leveraging off a strong crude market, as older tonnage has been seen exiting into the buoyant Aframax sector, Scorpio Tankers commercial director Lars Dencker Nielsen said.

On the LR2s time charter equivalents on the Gulf-Far East voyages have increased from $8,000/d in the third quarter to $13,000/d in the current market, as widening West-to-Asia naphtha arbitrages have translated to TCEs for East Europe-Asia voyages from $6,000/d to $17,000/d, Dencker Nielsen said during Scorpio’s third quarter earnings call.
“Looking at a Western position list and with an open naphtha arb, we believe this market is poised for further strengthening,” he said.

Over the medium term, LR2 freight is seen leveraging off a strong crude market, where Aframaxes are currently fixing up toward $40,000/d for cross-Mediterranean trades and at $50,000/d for Caribbean-US Gulf Coast voyages.

USGC spot lightering costs almost tripled from mid- to end-October from $25,000/d to $70,000/d, the S&P Global Platts fixture log shows.

The vast clean/dirty freight spread where the dirty market trades at close to double the value of the clean sector for the 80,000 dwt to 120,000 dwt size vessels has incentivized owners of older LR2 tonnage to exit the clean market. Scorpio has seen “10 such units doing this in the past eight weeks” and expects the trend to continue with up to another dozen units moving to the dirty market.

Scorpio owns or finance leases a young Eco-design fleet of 38 LR2 tankers built between 2014 and 2017 and while the company has not been what’s referred to as dirtying clean tonnage, it has certainly benefited from this trend.

“I perfectly understand that someone else would immediately take that position and that is to our advantage,” Scorpio President Robert Bugbee said.

FREIGHT REBOUND WELCOME TO RECOVER NET LOSSES

The recent uptrend in the clean tanker market has been a welcome change for Scorpio, as the company posted an adjusted net loss of $141.3 million for the nine months ended September 30.

Scorpio had the need to raise over half a billion dollars in liquidity earlier in the year through a combination of bank financing, sale/leaseback agreements and the deferral of the most significant portion of 2019 convertible bonds, according to a senior company executive.

In addition Scorpio raised over $300 million in the last month to weather the challenging clean products tanker market, where TCEs had turned negative on a number of runs, according to Platts analysis.

The naphtha arb to Northeast Asia has also benefited the 55,000-80,000 dwt Long Range 1 tanker freight market, as huge volumes have been exported out of the US.

LR1s/MRs TOO REBOUND FROM ALL TIME LOWS

According to Dencker Nielsen, the LR1s have seen “a positive uptick in rates (TCEs) from all time lows $8,000-$9,000/d to $12,000-$13,000/d” with an equal increase in both western and eastern markets.

Medium Range tanker freight rebounded from global TCEs of $6,000/d to currently $17,000/d. While the UK Continent-US Atlantic Coast market has been trading at a low $5,000-$6,000/d TCE, the current Atlantic basin combination earnings had more than doubled from Q3 averages.

While the gasoline UKC-USAC run traditionally serves as the front-haul route to the back-haul US Gulf Coast-TA ULSD runs, it is “currently inversely priced like a backhaul reposition voyage”.

Platts assessed spot freight rates at Worldscale 112.5 or at $14.33/mt for the front-haul UKC-USAC route Wednesday, as rates for the USGC-UKC voyage were pegged at w145 or at $23.10/mt.

Scorpio Tankers currently owns or finance leases 109 product tankers, including 38 LR2s, 12 LR1s, 45 MRs and 14 Handymax tankers with an average age of 3.2 years and time or bareboat charters in 13 product tankers, including one LR2, five MRs and seven Handymax tankers.
Source: Platts

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