Europe-Asia naphtha trade to slow after Russian cargo laden tanker, Jordan attacks

Global freight and Asian naphtha prices are expected to get a further upward push this week as shipments from Europe slow following a weekend attack on a Singapore-bound, Russian naphtha-laden LR2 tanker in the Gulf of Aden and a drone attack that killed US servicemen in Jordan, market participants said Jan. 29.

Tensions in the Persian Gulf escalated after an attack by militants on US forces in Jordan resulted in three servicemember deaths and at least several dozen wounded, US President Joe Biden said in a statement Jan. 28. The attacks prompted US congressional leaders to quickly issue calls for retaliatory strikes against Iran and its proxies.

The Marshall Islands-flagged and 2018-built Marlin Luanda was carrying Russian origin naphtha for Trafigura purchased below the price cap in line with G7 sanctions, a company spokesperson told S&P Global Commodity Insights.

"Even those limited number of tankers which were taking a huge risk transiting through the Gulf of Aden will now be deterred and [will instead] take alternative longer routes," a broker based in Seoul said.

Europe's Mediterranean region is a major supplier of naphtha to Asian countries such as Singapore, Indonesia, Japan, South Korea, China and Taiwan.

Shipping brokers tracking such shipments estimated between 0.5 million mt and 1 million mt of naphtha moves from Europe to East Asia each month but said deliveries have slowed in January and are expected to be close to the lower end of this range.

According to a naphtha trader, the West-to-East arbitrage will see more product tankers traverse via the Cape of Good Hope compared with the Suez Canal, thus adding to the already tight supply and slower deliveries. The front-month East-West spread, the spread between the Platts-assessed CFR Japan naphtha cargo swap and the CIF NWE equivalent, rose $5/mt from Jan. 26 to $39/mt mid-morning trade 3000 GMT, Jan. 29.

Platts, part of S&P Global, assessed the Mediterranean-Japan LR2 freight at $60.30/mt Jan. 26, surging 61% since early October. The LR1 freight rate has risen 39% over the same period to $62.50/mt.

The Indian navy's guided missile destroyer, the INS Vishakhapatnam, which has been deployed in the Gulf of Aden for anti-piracy operations, helped to extinguish the fire on the Marlin Luanda by using specialist equipment, its spokesperson said.

"It took 10 of our personnel and the ship's crew more than six hours to control the fire," the spokesperson said.

Piracy-related attacks are adding to the security risks and complicating matters further, maritime sources said. An Indian warship, INS Sumitra, deployed in Somalia and the Gulf of Aden, on Jan. 29 rescued an Iranian-flagged fishing vessel with 17 crew that had been taken hostage by pirates, the spokesperson said.

"The impact [of the Red Sea crisis] on the freight market is already there to see," a broker in Copenhagen said. The February FFA for benchmark Persian Gulf-Japan, LR1, basis 55,000 mt, traded at w335 Jan. 29, up from w280 on Jan. 26, he said.

The premium for Red Sea loadings compared with the Persian Gulf are also on the rise. Earlier, LRs returning empty from the Mediterranean would even give a discount to load in the Red Sea compared with those loading in the Persian Gulf due to higher flat rates and a shorter ballast leg. The Red Sea-East Asia routes are now commanding a w75 premium to the Persian Gulf-East Asia routes.

Clean tanker freight for Europe-bound voyages stood at its highest level in almost four years on Jan. 29, as longer voyages via the Cape of Good Hope amid the Red Sea crisis led to an increase in turnaround times for ships and squeezed supply. This translates to $110/mt for LR2s, up from $24.67/mt on Dec. 1, on the Persian Gulf-UKC route. For LR1s, the same route has increased to $105/mt from $42.7/mt on Dec. 1, S&P Global data showed.

Platts assessed Persian Gulf-UKC LR2 at $8.25 million Jan. 29, a level not seen since end-April 2020, when it was at $8.8 million, S&P Global data showed.

In the wake of the latest round of attacks, further hikes in freight rates cannot be ruled out, brokers said Jan. 29.