Oil demand destruction, reduced refinery run rates and overall economic slowdowns amid the coronavirus pandemic have intensified the typical slow period in the Americas tanker markets and positioned the third quarter to be bearish, as barrels sold out of floating storage will increase global tonnage avails.
The VLCC, or Very Large Crude Carrier, freight market has been on a downward trajectory since mid-April, when OPEC+ made the decision to implement crude production cuts of 9.7 million b/d over May and June. Freight for the benchmark VLCC 270,000 mt USGC-China route has dropped 68.5% in just over two months from $17 million on April 21 to $5.35 million on July 1.
The record crude production cuts instituted by OPEC+ members have left June with the lowest monthly global VLCC cargo volume in over a decade, according to shipping analysts at Charles R Weber research. The 9.7 million b/d cuts have been extended through July, following the June 6 OPEC+ meeting, with no plans for extending record cuts into August.
Tanker freight historically flatlines during the summer, and most recent VLCC rates were at levels not seen since July 2019.
Aframax markets, too, were impacted by these bearish fundamentals amid volatile oil market dynamics. While freight for the benchmark 70,000 mt US Gulf Coast-UK Continent route peaked at w205 or $41.78/mt on April 23, June saw rates no higher than w72.5 or $14.78/mt, and the year’s record low settled at w50 or $10.19/mt on June 3.
“The issue is the summer, but also the fact that there are low volumes due to lack of production,” an Aframax shipowner said, noting the massive drop in US crude oil production seen since March.
According to US Energy Information Administration, US crude oil output averaged 10.9 million b/d for the first four weeks in June, down 2.1 million b/d from March.
Oil product demand destruction slashes clean freight
Demand destruction for petroleum products, particularly in Latin America, led to decreased exports from the USGC in June, slowing even further the traditionally slower summer season for clean tankers. In addition, stay-at-home orders in Latin America and a pileup of tankers as floating storage in those regions led to a decline in cargo demand, which in turn prompted freight to fall in May and June.
With the Asian and European markets facing equally bearish fundamentals, Medium Range tankers piled up in the Gulf of Mexico, pushing freight to the lowest levels since June 2019. The 38,000 mt USGC-East Coast Mexico route dropped to the lowest year-to-date lump sum value of $150,000 June 22-24, a 24% drop month on month.
Brazil, the second-largest importer of USGC products, saw an increase in exports of products by Petrobras, with data from cFlow, Platts trade-flow software, showing 228,000 mt exported to the US Atlantic Coast and 1.4 million mt to Europe since March. Demand for MRs to voyage from the USGC to Brazil was limited, and freight reached a floor of $19.18/mt June 23, a 28% drop month on month.
MR owners wait for higher product demand, exports
Looking ahead, clean tanker market participants expect that limited USGC product exports will keep freight depressed, with typical summer conditions exacerbated by the effects of the coronavirus pandemic.
“The USGC export [market] is reliant on Mexico and Brazil, so if they aren’t showing demand we will be shaky on the ability to pressure freight with activity,” a clean shipbroker said.
A second clean shipbroker said demand in Mexico was increasing for July laycans. Increased fixing activity from PMI in the last decade of June supported this, allowing for a slight uptick in freight on the USGC-East Coast Mexico run. The route was assessed July 1 at lump sum $225,000, up 50% week on week in response to increased fixing ahead of the US’ July 4 holiday weekend.
Increasing US refinery utilization supports elevated spot cargo inquiry, as EIA data for June showed USGC refinery utilization averaging 78%, a slight increase from May’s 73.55% average.
Floating storage unwinds, flooding tonnage onto USGC markets
The dirty tanker market has been plagued by lengthy tonnage on a combination of slim cargo demand and the unwinding of floating storage booked in March and April.
The total amount of floating storage on the water for ships sitting idle for over seven days is currently 310 million barrels, 20 million barrels lower than a month ago, shipping analysts at Alphatanker said in their June report. This includes 170 million barrels of crude and 50 million barrels of fuel oil.
The MR market saw the return of tankers previously used as floating storage in Latin America and Europe in June, which provided an influx of tonnage on the USGC and steepened the June freight drop. In East Coast Mexico alone, the number of ships waiting for discharge decreased from 60 tankers in late April to 10 in the end of June, sources said.