Dirty-to-Clean switches on larger tankers help tame volatile LR freight rates

Dirty-to-Clean switches on larger tankers help tame volatile LR freight rates

In this blog we explore the drivers, the impact and the sustainability of the recent “clean-up” of Suezmax and VLCC tankers

02 July, 2024
Ioannis Papadimitriou
Ioannis Papadimitriou, Lead Freight Analyst, Vortexa

One of the key trends that has unfolded in the tanker market from the start of this year is the crude-to-clean switches witnessed on LR2 tankers. This in essence has reflected the stronger earning potential of LR2 compared to Aframax. 

However, lately the dirty-to-clean switches have entered a new dimension, by occurring on bigger tankers. According to our data, there are 15 Suezmaxes and 4 VLCCs which either have or are in the process of switching from carrying dirty to clean cargoes in 2024. These tankers are involved in voyages predominantly originating from the East of Suez (mainly Middle East and India) and destined towards the West of Suez. For the sake of clarity none of these vessels are newly-built vessels which carry clean cargoes as part of its maiden voyage(s); as these technically are not considered switches.  There are also an additional 4 VLCCs, which are likely candidates to also undergo a Dirty-to-CPP switch. 

Historically these types of switch on larger vessels has been occurring rarely, predominantly by oil companies that were owning/long-term chartering a vessel and the switch was facilitating its transporting operations.

Number of CPP voyages carried by selected vessel classes by departure date 

Nevertheless this time around, trading houses have played a crucial role in instigating these switches in an effort to raise profitability by leveraging economies of scale. The Red Sea attacks which led to Cape of Good Hope rerouting has driven a volatility surge on East to West LR rates, which up until recently were hovering at all-time highs (excluding the floating storage boom period during covid). On the other hand, Suezmax and VLCC rates are displaying more stability, with the latter continuing their declining trajectory since the end of May, currently at the lowest levels for the year.

As the chart above illustrates, a record-high of non-newbuild Suezmax voyages carried CPP in June, which seems to have an effect on LR rates already. For instance TC20 Middle East-to-Europe LR2 freight rates, have recorded a 10% m-o-m decline, currently at the lowest level since mid-April. This brings forth a key question as to whether these switches will continue to occur. 

LR2s trading in Clean vs Dirty market

Looking at the number of LR2s operating in the clean vs the dirty market there has been almost no movement in the trend over the past two months indicating that there is likely no additional incentive for owners to switch to the clean market. This could likely mean that the current demand requirements, especially for East-to-West middle distillate flows can be satisfied with the current tonnage supply, and with LR rates already softening, opportunities for clean-ups on the larger counterparts might diminish. Having said that, further weakening on VLCC and Suezmax rates in relation to LR amidst the summer lull season might see a further outmuscling of the smaller counterparts.

This outmuscling could have a domino effect on other vessel classes. More specifically, demand for MR2s in the East is muted, with utilisation per day dropping by 4% q-o-q. In a similar fashion MR freight rates in the region have softened. South Korea-to–Singapore MR rates have dropped by 30% according to Argus price assessments.

The fact that LR1s and LR2s are losing their share in the East-to-West middle distillate flows to their larger counterparts, could add additional risk for these MRs in the Pacific. Less employment opportunities for LRs towards the West, could shift attention to the East. Evidently, the percentage of LRs heading to the Atlantic after loading in the Pacific has dropped in June to 18% from a record 28% in April, which is the lowest share since February 2022. 

Ioannis Papadimitriou
Lead Freight Analyst
Ioannis Papadimitriou
Ioannis is a Senior Freight Analyst at Vortexa, with experience in the analysis of energy trade flows and the shipping markets. Ioannis holds an MSc in Shipping, Trade & Finance from Bayes Business School as well as an MEng in Marine Engineering & Naval Architecture from the University of Strathclyde. He is also a board member of the Shipping Professional Network in London (SPNL).