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Elevated naphtha exports from Europe supported long-haul voyages in favour of LR2 tankers. Yet, will this trend contribute to uplift LR2 freight rates?
The naphtha arbitrage window from Europe to Asia re-opened on the back of strong petrochemical demand, which led to resurging exports originating from Wider Europe (incl. Russia and all Mediterranean shores).
Wider European naphtha exports on LR2 vessels by destination region (kbd)
This triggered an uptick on long-haul voyages, making a positive impact on the LR2 tanker segment (see chart above). By harnessing the power of Vortexa freight analytics, LR2 utilisation departing Europe while carrying naphtha has reached its highest value for 2021, mainly supported from the increased naphtha demand in Northeast Asia. 4 LR2 vessels are heading towards Singapore but are expected to change their final destination towards the Far East. LR2 tanker utilisation is also complemented by the steady bookings towards the East Coast of South America, as shown in the chart below.
However, this surge in LR2 bookings triggered a smaller uptake on LR1 tankers. After peaking in late March, LR1 tanker utilisation has dropped by 62% for the week ending May 23. Currently there is no LR1 tanker in-transit, carrying naphtha towards Asia.
LR2 utilisation (no. of vessels) & tonne-miles (billion) vs LR1 utilisation carrying naphtha ex-Europe
The reason for this shift in utilisation dynamics Is related to freight costs. The freefall of LR2 Mediterranean – Asia rates throughout April drove charterers to favour this tanker segment. While in late March/early April, LR1 tankers were actually cheaper on a $/tonne-basis, over May the bigger LR2 segment had a $5/tonne advantage, according to Argus Media.
LR1 - LR2 Europe-Asia freight rate spread by Argus Media (LHS)($/t) vs LR2 availability in the Black Sea (RHS)(vessel count)
Current dynamics are however unlikely to provide a boost to Europe-Asia LR2 freight rates. Looking at freight supply analytics, the LR2 tonnage availability for the next 15-30 days is on an upward trajectory, as displayed in the graph above. This is unsurprising when considering that LR2 vessels are seeking employment in the West of Suez as VLCC clean maiden voyages from the East to the West are on the rise. Similarly on the demand side, Black Sea flows towards Asia could weaken once again, as a negative LPG-naphtha pricing spread currently deems LPG – which competes with naphtha as a feedstock in the petrochemical industry – a more economically sensible option for steam crackers in Asia. At the same time, blending demand into the gasoline pool in the Atlantic Basin (shipped on smaller vessels) may be an alternative destination.
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