DIRTY TANKER QUARTERLY: Europe's crude replacement, US SPR move to drive USGC tanker flow

A shift in US-origin crude exports as Europe is looking to replace 2.7 million b/d of self-sanctioned Russian barrels combined with a historical US Strategic Petroleum Reserve release of 180 million barrels over the next six months will support dirty tanker freight rates out of the Americas into the second quarter of 2022.

Freight for two major benchmark routes carrying US-origin crude to Europe and Asia has jumped since the Russian invasion of Ukraine on Feb. 24, with rates up 74.1% and 53.9%, respectively. The 70,000 mt USGC-UKC route was last assessed April 7 at w235, or $42.93/mt, and the 270,000 mt USGC-China route at $8 million, both levels not seen since the early second quarter of 2020 during the floating storage boom.

This trend is expected to continue into the medium term with rates so far seeing no ceiling and looking even more promising on the USGC as the US SPR release positions USGC crude in a favorable position for export.

The US announced in the week ending April 1 a 180 million barrel drawdown on crude in the SPR over a six-month period, with the International Energy Agency shortly thereafter announcing that its member countries had agreed to release a collective 120 million barrels back into the global market. These volumes are expected to spur on increased tanker movement, especially out of the USGC for export barrels not utilized in domestic refining processes.

"I assume it will take a few weeks to get bids in, process them, and award the barrels before we see an increase in flows but at 1 million b/d, odds are we will export more," a shipbroker said. "The sour [crude] will stay here to replace Russian stuff, the light [crude] will export, and this means an extra need for a minimum eight-10 Aframaxes for USGC-[UK Continent/Mediterranean runs] a month."

On the USGC-Europe runs Aframaxes typically carry cargoes of around 700,000 barrels while Suezmaxes and VLCCs take approximately 1 million barrels and 2 million barrels, respectively.

Increase in US exports

These export trends have already emerged in recent weeks, with the US Energy Information Administration reporting a total of 3.7 million b/d of total crude exports for the week ended April 1, a weekly increase of 705,000 b/d, with Europe taking a massive 906,000 b/d more than the week prior.

Asian crude export destinations are expected to vary in their increased uptake of US crude, with South Korea and Japan expected to build US imports, while China and India could continue to buy Russian crude in the meantime, shipping sources have said.

"Data point to Europe taking the majority of incremental exports, a key driver in propelling Aframax TCE [Time Charter Equivalent] rates on the [USGC-UKC] run close to $33,000/d," shipbroker BRS said in its weekly report April 4. "It will not only be Aframaxes who gain, we expect that VLCCs and Suezmaxes will receive a boost from renewed appetite for US crude in Asia. South Korea has already indicated its willingness to up purchases from the US, which could see its imports rise above 400,000b/d."

Intertrade among ship classes

With the majority of trans-Atlantic voyages seen on midsize Aframax tankers, freight for the smaller ships saw the initial bump in rates following the Russia-Ukraine conflict escalation, but charterers have been looking to larger tonnage to move their barrels across the Atlantic. Intertrade among the shipclasses typically put a cap on rates, aiding competition when regional position lists look tight for certain ship classes. Yet market participants expect that after an initial cycle of Aframax volume cannibalization by VLCCs and Suezmaxes, charterers will return to smaller tonnage and move along the trade lines as they see economically favorable.

The Suezmax/Aframax freight spread on the USGC-UKC voyage widened to $22.82/mt on April 1, almost double the average February spread of $11.85/mt, signaling a major economic advantage of taking the larger tonnage ship.

VLCCs have enjoyed increasing charterer interest on the USGC-UKC runs, with a total of five of the behemoths booked during the month of March and another five April 1-5 This is up from the two VLCCs seen in both January and Febuary 2022 and up significantly from a total of five VLCCs making trans-Atlantic runs in 2021 and two in 2020.

Expectations for the longevity of utilizing VLCCs for trans-Atlantic runs are mixed with logistical issues arising from taking ships outside of the midsize tanker force.

"The VLCC market is driven by Suezmax demand," a second shipbroker said. "All of this is about Europe and most ports in Europe are too small for VLCCs."