Clean MR tankers show early signs of another vessel supply shift
Clean MR freight rates in the East of Suez are rising in unison of late, while those in the West are more volatile, moving up and down in pockets. As a result, we could see a repositioning of MRs from West to East.
The clean tanker market is experiencing a roller-coaster ride this year, beginning with the Russia-Ukraine conflict, which has hurled freight rates towards the upside even when fundamentals for some were not that supportive. The question is whether clean rates on either side of the globe are likely to stabilise at high levels, or is more volatility on the horizon?
Looking towards the Western hemisphere, we see a mixed bag of performances from clean tankers. On one hand, the surge in MR tanker supply in the Atlantic Basin capped rates out of the USG towards Europe (TC14) and South America (TC18), with freight rate hikes proving regularly short-lived. On the other hand, MR freight rates out of Europe towards the US (TC2) show strength comparable to Eastern MR freight rates, with tanker earnings doubling on the route since April. With MR supply in the US Gulf outweighing that in Europe, it is no surprise that we see TC2 thriving relative to TC14. This is beginning to change as MRs begin to arrive in Europe, increasing vessel supply.
Eastern MRs thriving in unison
MR freight rates in the Eastern hemisphere have reached stellar levels since Russia’s invasion of Ukraine, mainly owing to tight tanker supply as MRs migrated to the West to move gasoline and diesel within the Atlantic basin. Intra-regional CPP demand remained low in the Pacific region until Southeast Asia re-opened borders and rolled back Covid restrictions in April. This saw increased CPP exports to Southeast Asian and Oceanian countries and boosted Pacific MR rates. LR tankers also benefited as they filled gaps left by low MR supply.
After a brief lull in mid-April, yet another surge in clean rates was observed as MR supply remained thin, and transportation fuel demand increased further and China announced additional product export quotas. This led to increased MR tonne-miles, and a loss in tonne-mile share for LR tankers as demand for larger tankers plateaued, driven amid other factors by disappointing naphtha demand. As it stands, MR tankers remain busy across the East of Suez, with limited (but no longer declining) vessel supply.
As for the short-term outlook, TC2 rates look set for a marked correction. This is due to sharp vessel supply builds in the West of Suez region, shown above. On the demand side, gasoline flows towards the US are likely to have already peaked, with flows plateauing on the route and TC2 freight rates following suit. This would see more of an alignment between West of Suez MR freight rates, which are likely to stay under pressure as long as availability remains high. As for diesel, while cracks remain high, the lack of supplies is unlikely to get solved anytime soon, disappointing procurement hopes and keeping tonne-miles from a shipping perspective range-bound.
Looking further into the future, we may see a deeper shift in MR tanker supply, as high freight rates in the East could entice more MR operators, leaving the West with lower MR supply overall. This shift is somewhat overdue, as Eastern freight rates continue to go from strength to strength. The supply shift seems to be taking shape, as the trend of MR numbers in the East has now switched from a downward trajectory to an upward one. Although the change has been slow, the trigger for an accelerated supply shift may well be the potential drop in TC2 rates, a key pillar keeping MRs so far from making their move to the East.