Cargo Switchover Activity Supporting LR2 Rates
June 3, 2022
Cargo switchover activity has been on the rise lately, with a clear trend forming among coated Aframax/LR2 owners in switching their tankers to trading dirty after the volatility caused by the war in Ukraine and risk premiums boosted rates. Looking at past statistics, there has been some cyclicality on cargo switchovers that has affected Aframax/LR2 market accordingly, but since Q3 2021 we have observed a strong uptick in LR2s beginning to trade dirty, given the low earnings environment.
With the start of the war in Ukraine and subsequent sanctioning of Russian oil (official and self-sanctions), Aframaxes found opportunity to trade on increased rates both because of the risk premiums inflating rates but perhaps more importantly with the re-drawing of trade routes and significant increases in export activity from the Americas to Europe, activity that typically benefits Aframax and Suezmax tonnage. In terms of numbers, we saw spikes of a net 6 LR2s switching to DPP in March and a net 9 in April and a net 5 in May (Figure 1). This activity has brought the cumulative total since the beginning of 2020 to 50 ships.
The same activity is also partially responsible for the strong LR2 market as of late, as the net size of the fleet is shrinking with each switchover. Combined with a good deletion schedule for the sector and a spike in demand for CPP cargos from the AG to Europe – especially since the loading region is adding close to 740,000 b/d of refining capacity this year – it has kept tonnage lists relatively thin in key loading regions.
Finally, we point out that the strong CPP markets will in turn create incentives for owners to clean up these LR2s, which although a costly process, could still provide economic benefits if timed right. We do not anticipate that all 23 switchovers since January will “clean-up” in the short-term; however, should owners decide to change course, a trend reversal in clean earnings can be expected to some degree.
Figure 1 – LR2 Cargo Switchover Activity
Source: McQuilling Services
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