CLEAN TANKER QUARTERLY: Russia to dominate market outlook moving forward

Clean tanker markets will likely continue to scramble for available options across all vessel classes heading into the weaker second quarter, with question marks over Russian-origin oil products continuing to dominate prospects in the near term.

In an unprecedented quarter in which the Russian invasion of Ukraine triggered a tumultuous change in market dynamics, a divide quickly materialized to cloud the market.

On one hand, many shipowners announced their intention to pull away from Russian product, highlighting the inherent risk that sanctions on either Russian counterparty trades or Russian product trades posed to a market under increased scrutiny. But elsewhere, a number of shipowners did not outline their intentions to exclude Russian trades and instead explored Russia options on a case-by-case basis.

What soon developed was the widest premium for recognized Russian markets – Baltic-to-UK Continent shipments and Black Sea-to-Med shipments on Handysize vessels – as the now reduced pool of shipowners capitalized on conditions in their favor.

Freight indications for Baltic-UKC rates on Handysize vessels hit as high as Worldscale 435 on March 7 – equaling the record high experienced in the market in April 2020 at the height of the rush for tankers rush during the initial stage of the coronavirus pandemic. Indications for Black Sea-Med rates on the same vessel class went as high as w475 on March 3, the highest since May 2020.

Russian exclusion pressures

A high volume of shipowners excluding Russian business lost crucial market share in key regions, and have had to explore alternative options. Ultra-low sulfur diesel tightness in the West prompted a high volume of Long Range tankers to ballast to Persian Gulf markets for highly attractive rates on back-haul runs to Europe in the latter part of the quarter.

With a non-existent arb for eastbound naphtha for the latter part of the quarter, Long Range owners are pinning hopes on ULSD flows for PG-UKC to continue into the second quarter, despite ballasting tonnage bloating the basin in turn.

Medium Range tanker markets received a welcome return of a backhaul market from the US Gulf, reviving the triangulation between UK Continent to the Atlantic Coast and the US Gulf back to UKC round trip. Rates for UKC-USAC shipments, basis 37,000 mt, hit multi-year highs on March 22 at w200, assisted by the USGC-UKC market rising in tandem, which also hit multi-year highs at w200 March 11.

MR owners will hope that this continued sign of higher ULSD imports from the USGC in light of reduced Russian business will help keep tonnage from bloating key basins in the Mediterranean and Continent, but an absence of ex-Russian shipments has weighed on many, which will potentially be exacerbated by the imminent transition out of the ice season.

Ice market questions

Escalated premiums in Baltic Handysize markets rapidly brought confusion throughout the first quarter, manifesting in a three-tier market. Some shipowners brought differing indications regarding factors such as ice requirements, Russia-origin loading requirements and Russian counterparty involvement, disrupting outflows as a result with a high volume of deals happening off market.

The melting of ice in the Baltic Sea will bring fresh questions as to the portion of the fleet willing to engage in Russian trades, with some speculating a high volume of shipowners without ice class capability will now pursue Russian barrels, bringing more competitive offers on the table.

"The ice melting could open the door to a few more ships competing for Russian premiums, and this is likely to bring it all down," a shipbroker said.

In tandem, ice tonnage unwilling to trade Russian barrels will most likely ballast into Continental and Med markets, pressuring indications in the medium term as a result.

Bunker uncertainty

A core factor in elevated Worldscale indications has been the unprecedented rise in bunker costs since the initiation of the Russia-Ukraine war, and this is likely to continue to affect shipowner strategies in the forthcoming quarter.

Prices for S&P Global Commodity Insights' Platts marine gasoil 0.1%S delivered Rotterdam price spiked to a record high of $1,542/mt on March 9, while marine fuel 0.5%S delivered Rotterdam also rose to a record high, of $1,109/mt, on the same day, as a result of the war affecting supply chains.

However, a drop-off in crude oil prices in light of news of a China lockdown due to a resurgence of COVID-19 in the country is likely to cap upside potential for bunker prices, which could provide some relief should output not be raised by OPEC.

Despite the lack of cargoes across a number of markets, bunker costs had provided a concrete floor for shipowners in the second half of the first quarter. Ballast obligations were met with demands for premiums on key routes, but a slowdown in inquiry will provide a stern test of shipowner resolve.

As EMEA demand for oil products crawls back to pre-coronavirus pandemic levels, the degree of product tightness due to geopolitical uncertainty will likely continue to plague shipowner sentiment in the quarter ahead.