Long Range clean tanker market sees sharp falls in freight rates since June 5

The Long Range clean tanker market has seen sharp declines in freight rates since June 5, due to weak refining margins, less exportable surplus and high storage inventories. The weakness in the market stands in contrast to previous years, when the usual pre-summer demand for gasoline and jet fuels is typically robust.

LR rates in the Middle East, Far East and Southeast Asia have declined day on day since June 5 and have hit fresh four-month lows, according to Platts data. Platts assessed LR1 55,000 mt Arab Gulf-Japan freight at $35.02/mt June 12, down from $43.10/mt May 31.

Cargo counts are low for LR clean tankers and continue to decline, one shipowner source said. For the first half of June, the number of LR1 fixtures in the Persian Gulf, India's west coast and Red Sea ports on the LR1s for long haul voyages are estimated to be less by a dozen compared with the six-month moving average, the source said.

One year ago, the number of such fixtures on LR1s and LR2s every fortnight averaged between 55 and 65 but are now fewer than 45, according to broker estimates. As cargo inquiry is low, keeping ships idle, shipowners are choosing to take shorthaul voyages within the Middle East or opting for backhaul in North Asia, sources said. They also point toward the unutilized export quota for refined products in China, which is reflecting in lower freight in the region.

"The freight outlook is awful, and it will remain on the lower side for some more time," a broker tracking such deals said.

Rates will decline further before they rebound, another broker said.

Earnings under pressure

This is also translating into much lower earnings for the shipowners. At an average bunker price of $567/mt, owners are now earning $19,000-$23,000/day on the benchmark Persian Gulf-North Asia LR routes, down from $73,000-$83,000/day a year ago, brokers said.

When the gasoline arbitrage window opened in late May, LR freight rose in Europe. Shipowners took advantage of the surge of price and accordingly made firm offers. Some shipowners hoped that freight would continue rising steadily.

"We are fine with earnings so far this year," an executive with a Norway-based shipowner said. "They are not as great as 2022, but we want to achieve long-term stability."

Owners had hoped that fresh gasoline demand from the US and West Africa and naphtha demand from Brazil would sustain LR1 rates in Europe; however, the arbitrage economics hadn't worked well since June 5 amid weakened demand. As a result, the LR market went from balanced to oversupplied, and charterers progressively lowered their bids. Platts assessed the LR1 UK Continent to West Africa run at w125, down from w135 May 31. The rate was around w300 in early June 2022.

LR2 market unsustainable

The LR2 market in Europe for the voyage from the Mediterranean to Japan moved in tandem with the correction in the East. Freight increased to $3.2 million from $2.8 million in late May when the East market jumped up. However, without any new injection of cargoes, the increase in freight was not sustainable.

Consequently, the LR2 market inched down when the Persian Gulf-Japan rate softened. Shipowners turned anxious. Some tried to pick up diesel cargoes in the US Gulf Coast for a trans-Atlantic run, but the arbitrage economics were not workable. As a result, LR owners in Europe chose to ballast through the Suez Canal, hoping to load cargoes in the Persian Gulf to meet demand in the Far East.