Softening European gasoline market and short-haul Russia diesel employment puts pressure on MRs in Europe

High arrivals of TA diesel into NW Europe mean increasing numbers of MRs subsequently competing for available cargoes in the region. This is occurring while the peak period of gasoline demand in US PADD 1 has ended, and opportunities for employment on TC2 are softening. Rising gasoline inventories in PADD 1, which are above last year’s levels (EIA), are evidence of the softening in demand.

At the same time, the Dangote refinery substantially increased its exports of gasoline in June, pointing to a functioning RFCC unit and recovering production levels after the outage in the spring. This signals further headwinds for tonne-mile demand for NW Europe-origin voyages. Declining demand for both TA voyages and voyages to WAf greatly reduce the opportunities for new arrivals to Europe to find employment.

Also adding further pressure to supply and demand fundamentals in the European MR market are shifts in Russia diesel export patterns (read more here). Russian diesel exports in June were 18% above the seasonal average, but growth came from Black Sea-origins to short-haul Mediterranean destinations at the expense of the lengthier Baltic-to-Brazil flows (which are at 5-month lows). Furthermore, more of these short-haul Black Sea-to-Med flows are on Handies instead of MRs, pressuring overall tonne-mile demand for Russia-trading MRs. Declining MR employment to facilitate Russian diesel exports, especially towards Brazil, puts more supply-side pressure on an already weak European MR market.

All these factors contribute to a widening vessel supply imbalance between the “East” Atlantic (Europe, Med, WAf) and the “West” Atlantic (East Coast North America and South America). Demand momentum sits within the “West” Atlantic – where vessel supply is tightening – explaining the sharp rise in spot freight rates for Gulf of Mexico-origin routes. Not only is demand high for TA diesel voyages to Europe, but PADD 3 diesel exports to Brazil increased 130% m-o-m in June, and exports of road fuels to East Coast Mexico and South America West Coast are robust.

Furthermore, triangulation opportunities enabling MRs arriving in Europe to find a cargo to reposition back to the Americas are increasingly difficult as TC2 demand dries up. This should further cement the tonnage imbalance. We are beginning to see an increase in ballast vessels leaving NW Europe to head to the Americas, but this has not yet reached the highs we saw in Q4 last year, when TC14 demand reached record highs and Europe was oversupplied with MRs. However, the vessel supply differential between the “East” and “West” Atlantic has currently widened to levels we saw at that point, and TC14 rates are currently higher. This points to the fact that this natural supply imbalance might begin to correct itself as vessels reposition to chase high earnings in the Gulf of Mexico.

Diesel/gasoil requirements in Med driving high European TA import demand

A main driver of Europe’s strengthening diesel demand is strong demand for diesel/gasoil in the Mediterranean – a result of prolonged refinery maintenance, the lead up to the summer travel season, and power generation needs in North Africa. Med diesel/gasoil imports in June were 10% higher than the seasonal record-high and 25% higher than seasonal averages, and we expect this to continue to remain supported. Europe’s distillate stocks are low – in May ARA distillate stocks were over 10% lower y-o-y (Argus) -and power generation needs in the Med are expected to continue until September. This big pull for diesel/gasoil from the Med plus low inventories on the continent should continue to lift Europe’s overall demand for diesel and therefore the TA diesel flow. Strong Med demand could also incentivise MRs facing low earnings in a weak European gasoline market to take on handysize parcels for intra-Europe trade.

Medium-term outlook: Atlantic MR market revolves around the Gulf of Mexico

Moving forward, we expect the strength in middle distillate cracks in Europe and the softening of LR freight rates out of the Middle East to stimulate more E-W LR departures, which had declined in recent weeks.

However, voyages fixed due to the current open E-W arb will not arrive quickly due to long voyages via the Cape of Good Hope. Europe’s seasonal need for middle distillate supplies is more immediate, so we expect TA diesel flows to remain the viable option, which should keep Atlantic MR tonne-mile demand supported. The imbalance in supply and demand fundamentals within the Atlantic Basin MR market is likely to continue unless a substantial amount of tonnage chooses to ballast over to the Americas. Weighing up the challenges to demand for Europe’s gasoline, shorter-haul Russia MR voyages and Europe’s continued need for middle distillates from outside the continent, it is clear the fulcrum of Atlantic MR demand is shifting across the Atlantic to the Gulf of Mexico.