Emerging East and West CPP Trends
June 10, 2022
In the West of Suez markets, product demand in the Caribbean and Latin America regions has been increasing to pre-pandemic levels, exacerbated by factors such as severe droughts in Brazil that have necessitated importing higher volumes of gasoil for power generation. With gasoil balances in Europe tightening after the ceasing of Russian imports, the US Gulf region refining system emerged as the “natural” market for those requirements. Combined with incidents of inclement weather in the Gulf the past two months, freight rates for MR2 tankers gained, and for the most part retained strength with the USG/CARIBS MR2 trade gaining almost US $500,000 on average from March to April and staying over the US $1 million mark in May.
Perhaps even more interesting has been the development of the transatlantic trade for MR2 tankers originating in Northern Europe. The start of the US driving season in the end of May and subsequent increase in gasoline demand in the country has created a pull for imports from Europe. In the latter region, refiners completed their planned maintenance and were able to increase runs, resulting in a projected 328,000 b/d of added gasoline length in April – July (Figure 1). The TC2 UKC/USAC trade is currently averaging WS 354 after a WS 329 the previous month and we expect the strength to continue.
In the East of Suez, we isolate the strength in the LR markets, which initially benefitted by the “scramble” to find replacement barrels for lost Russian volumes in Europe. Here, the Middle East emerged as the primary export market, especially considering the region is expected to add close to 740,000 b/d of refining capacity this year alone. The ceasing of naphtha cargos from the West to the East after the war, combined with the recent increase in LPG prices have also created a naphtha pull from the AG to the Far East, further strengthens the position of these larger clean tankers.
Finally, we call into attention additional structural support for LR tankers, created from an observed trend among LR2 owners to “dirty up” their tonnage (covered in last week’s highlight) as well as an increase in LR2 floating storage numbers for the months of April and May (up by 11 tankers since March). Both these factors have been tightening the total supply, something that has a direct positive effect on freight rates.
Figure 1 – European (MED + NWE) Gasoline Balance & TC2 UKC/USAC MR Freight Rates
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