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12-12-2018

Tankers: Clean LR2s switch to sturdy dirty Aframax market

A strong dirty tanker market has encouraged owners of clean Long Range 2 vessels to lock in high freight rates for crude and fuel oil stems, sources said.

“As the Medium Range tanker market is very hot right now, people are looking to LRs”, a Geneva-based shipbroker said.
“The dirty is at a premium rate to clean, so owners are switching” an LR-shipbroker source said.

Up to 20 LR2s — which can carry around 80,000 mt of product — were said to be operating in the dirty product market.

While there is no expense involved in an LR2 going dirty, it costs $500,000 cost plus associated delays to clean out its tanks after taking dirty products and it then needs to transport at least three Gasoil stems to be considered a true clean products tanker again. Also, not all LR2s can take clean and dirty products, the vessel needs to have coated tanks, sources said.

The lump sum freight cost to carry an 80,000 mt clean petroleum product cargo from the Mediterranean to Japan on an LR2 was assessed at $2.65 million Tuesday, S&P Global Platts data showed, on the back of low vessel availability. That was down from an all-time high of $2.70 million on Monday.

However, the clean market has recovered a little versus the dirty sector.

“LR2s are now seeing Worldscale 185 for 75,000 mt stems from the Persian Gulf to Japan versus a weakening Kuwait to Singapore dirty tanker route,” a shipowner said.

Most of the LR2s which have switched to dirty were operating West of Suez. The economics of switching work if you take a cargo east to west and then switch to dirty petroleum products. The East is weak and you do not switch in a weak DPP market, another shipowner said.

CLOUDY FUTURE FOR DIRTY MARKET
The International Maritime Organization’s 0.5% global marine fuel sulfur cap from 2020 means demand for high sulfur fuel oil will plummet as shipowners have to source less sulfurous fuels.

That will see refiners further cut their production of heavy fuel oil, with ongoing refinery upgrade programs in Northwest Europe and Russia focused on a reduction in heavy residue. The resultant increased coking and hydrocracking capacity in Europe has tightened the European fuel oil market.

As shipowners have switched their vessels to dirty from clean to capitalize on current freight rates, 2019 could see a battle among shipowners for fuel oil cargoes.

“The production of fuel oil won’t be high in 2019 with the refinery upgrades,” a fuel oil trader said. “If you do not have oil then what product do you move as a shipowner?”

One factor supporting shipowners switch to dirty from clean was the exceptional demand this summer for European fuel oil cargoes from Saudi Arabia for air-conditioning and desalination requirements.

Saudi Arabia drew some 4 million mt from Europe from May through September on Aframax vessels.

The cross-Mediterranean Aframax route, basis 80,000 mt, has been firm for the past two months, hitting levels this week not seen since February 2015, according to Platts data. A combination of bad weather and Turkish Straits delays allied with strong demand has driven the market higher, sources said.
Source: Platts

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