Freight costs on the Americas clean tanker market started the first quarter of 2019 strong, carrying over momentum from the high rates of Q4 2018.
Despite market expectations at the end of December that rates would continue to fall, the first week of January saw freight costs out of the Americas increase as available tonnage was snapped up by charterers looking to cover cargoes early.
“The USGC had a bunch of year end activity and no re-supply of vessels from Europe, so rates exploded,” a shipbroker said. “Rates went up a bit this week I think because a lot of charterers waited until this week to fix.”
The shipbroker anticipated that shipowners may try to maintain momentum from the high rates of Q4 2018.
“Owners aren’t quickly forgetting the rates they enjoyed in November and December, and are fighting to keep the rates up,” he said. “I don’t think we will see a major crash here for a while.”
This upside potential for rates in the upcoming weeks will be supported by sustained demand, according to a shipping analyst.
The fourth quarter of 2018 showed the highest $/mt levels across all MR routes in the past three years and the highest ever amount of petroleum product exports from the US, averaging 5.57 million b/d in December, according to EIA data.
Additionally, the US middle distillate arbitrage to Europe saw the second-highest US arbitrage volumes of 2018 in December. Despite the arbitrage’s closure at the end of December, as of January 2, 700,000 mt of distillates are already scheduled to arrive in Europe from the USGC in the first month of the year. This amount exceeds January 2018’s middle distillate arbitrage volume of 620,000 mt for the entire month. The naphtha arbitrage from the US to the Far East also shows signs to be opening in early January, with multiple Long Range 1 and MR tankers heard on subjects to make the voyage in early January.
The increased activity on the middle distillate arbitrage could be a factor of the refinery maintenance season coming to an end. According to a Scorpio Tanker’s Investor and Analyst Day Presentation, the percentage of global refinery capacity offline peaked in mid-October, and was on the decline through November and December. Scorpio projected global refinery offline capacity to amount to less than 1 million b/d offline this month, 1.5 million b/d to 2 million b/d lower than the January 2013-2017 refinery offline capacity average.
Increased refinery capacity utilization could lead to an increase in exports of refined products in January compared to prior years. On the US Gulf Coast, Energy Information Administration data showed refinery utilization at a high December 2018 average of 97.7%, up 3% from the 2013-2017 December average refinery run rates.
For the week ending on December 28, the EIA recorded USGC refinery utilization at a so far unmatched weekly rate of 99.4% since the week ended June 4, 2010, the first recorded USGC refinery utilization. High utilization rates prompted increased in US refined stocks in the first week of January, with distillates increasing 9.35 million barrels and gasoline increasing 6.89 million barrels as of January 4.
Winter weather of the first quarter could have a negative effect on vessel flow and availability, as port and ship channel fog closures are common in January and February. Ship channel closures could lead to a shortness of available vessels, should charterers need to lift a cargo in a prompt window, pushing freight costs higher.
“Fog closures are good for business,” a shipowner said.
According to S&P Global Platts data, in Q1 2017 the Houston Ship Channel was closed due to fog for almost 282 hours, or the equivalent of 14 days, or 15% of the first quarter, which contributed to market volatility.
SENTIMENT TO SOFTEN END-JANUARY
Activity on the Americas clean tanker market picked up in the first week of January, though market sources are unsure if the momentum will last. A second shipbroker anticipated activity and cargo supply in the second decade of January to slow, leaving time for vessels to pile up in the Gulf. A USGC MR position list from January 4 showed fewer than five vessels available through January 7, but through January 14, vessel availability numbered in the mid-30s.
Clean tanker freight rates on the European market have been on a downward trend at the beginning of January, and are expected to decrease further, which could prompt vessels opening in Europe to ballast to the Americas. Additionally, the gasoline arbitrage from the European Continent to the US Atlantic Coast is expected to reopen in early January, which will flood the Atlantic Coast and Gulf Coast with vessels moving from the European market. Low freight rates in other markets could also push owners to do more short-haul voyages in the Americas, keeping high numbers of vessels in the Gulf.
“I think we will see a slowdown in the second half of January, but it all very much depends on the naphtha arbitrage and the ULSD arbitrage,” a second shipowner said. “If they continue then it will pull a lot of tonnage out of the USGC and it would be a bullish factor.”
After an initial increase in rates in the January, market participants expect freight costs will decrease into February and March as the active winter season draws to a close. Forward Freight Agreements on the US Gulf Coast-trans-Atlantic route are forecast to have a Q1 average rate of $19.57/mt, with January’s forecast average rate at $23.72/mt, February’s at $18.47/mt, and March’s at $16.52/mt, according to a third shipbroker. According to Platts data, the average $/mt level for the USGC-trans-Atlantic route in Q4 2018 was $22.75/mt. A quarter-to-quarter shift from $22.75/mt to $19.57/mt would show a decrease of almost 14%.
Source: PlattsPrevious Next
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