Global tanker freight rates seen elevated in Q2 on refinery margins; maintenances to cap gains

Global dirty and clean tankers freight rates are expected to remain elevated in the second quarter on high refinery margins, slow fleet growth and longer voyages amid geopolitical disruptions, but the looming refinery maintenances are likely to keep gains in check, according to market participants and analysts.

The OPEC+ supply cuts are still in place even though the organization has forecast an over 2 million b/d increase in oil demand this year. Fewer shipments of crude from the Persian Gulf to destinations such as Europe and India have been offset by longer voyages either from the US, or Russia, thereby supporting freight.

Global oil demand is projected to have risen by higher-than-expected 1.7 million b/d in the January-March quarter on the back of rise in bunkering and a stronger outlook for the US, according to the Paris-based International Energy Agency, or IEA.

"The freight outlook for this quarter hangs in balance. Normally there is a downside in the second quarter, particularly for crude, as Asian refineries undertake maintenance and therefore tend to import less," said Oslo-based Ole-Rikard Hammer, senior analyst for oil and tanker markets at Arctic Securities.

However, he cautioned that the rapidly tightening oil market, owing to the unusual combination of OPEC+ cuts amid still growing demand, could upend this trend. Strong refinery margins suggest that crude demand remains strong, despite high prices and any pre-summer build up in inventories could support freight, he said.

Scrubber fitted Very Large Crude Carriers on a round voyage on the Persian Gulf-East Asia routes are currently earning up to $39,000-$40,000/day, compared with $49,000/day, three months earlier, while bunker prices are now around $75/mt higher at over $650/mt, according to broker estimates.

Corresponding earnings for Long Range 2, or LR 2, tankers on the Persian Gulf-Japan route are around $32,000/day, little changed from three months earlier but even swung to $80,000-$105,000/day in January and March, implying heightened volatility.

"There is room for further upside in earnings even if current levels of disruption are maintained," said Adam Kent, managing director at Maritime Strategies International, or MSI, a London-based shipping consultancy.

MSI has raised its one-year time charter rates for tankers by a sharp 20%-30% to reflect the current market.

The fact that tanker freight is still more-than healthy, if not exactly booming, shows the impact of longer and more complex voyage distances and trades, owing to the ongoing wars, added Hammer. Clean tankers are the bigger beneficiaries of the rerouting via the Cape and also supported by higher refinery margins, he said.

Rise in bunkering

Market participants point towards up to two weeks of additional time being taken for every voyage from the Persian Gulf to Europe via the Cape of Good Hope due to the disruptions in the Red Sea.

Longer voyages not only mean higher ton mile demand but also increase in consumption of bunkers, which partly explains why their prices are higher than a quarter ago, they said. Most international organizations have forecast between 1.4 million b/d and 2.2 million b/d increase in oil demand this year.

At the same time, not all ships are giving up the option of transiting through the Red Sea.

Those tankers, which are loading Russian cargoes and heading to Asia, are often choosing to continue to use the most direct route despite the risks of passing through the Red Sea, MSI said in a recent statement.

Fleet growth

Attractive returns have slowed down demolitions, which has not significantly added to supply because the orderbook has been relatively smaller due to the uncertainty involved in choosing alternative fuels.

"While high demand and freight has kept ship recycling low, the limited orderbooks in recent years have equally contributed to it. Combined bulker and tanker newbuilding deliveries have also reached the lowest levels in 20 years," said Filpe Gouveia, an analyst with Bimco, one of the world's largest shipping associations, in a statement. Even ship recycling in the last eight quarters has been at a two decade low, Gouveia said.

Some of the tankers' demolition was postponed after the rerouting via the Cape of Good Hope pushed up demand, charterers said.

Nevertheless, the VLCC fleet may not grow this year at all. On the contrary, it could show a slight decline, according to Banchero Costa, or Bancosta, a Genoa-based shipping brokerage and consultancy. Delivery of dirty tankers peaked in 2017 and has been on a decline ever since, with just 43 deliveries last year and a projected 16 in 2024, Bancosta said in its latest report.

The LR2 fleet growth is also expected to slowdown and is projected at 3.5% for this year compared with 5.5% in 2023, the report said.

"There is much less uncertainty on fleet capacity growth, which is low and slowing with an extraordinarily low orderbook with most deliveries at least two years away," said Arctic's Hammer. Recent increases in tankers' newbuilding contracts will cause significant rise in deliveries only in 2025 and 2026 while cargo volume growth could remain low, added Bimco's Gouveia.

There is a potential for some of the ships returning to mainstream market due to stricter sanctions against Iran, and particularly Russia, but with the share of tankers that are more than 20 years old in the fleet continuing to grow, a tonnage capacity squeeze is looming, at least as long as the world economy is continuing to grow, added Hammer.