LR2 Floating Storage Development
June 24, 2022
The LR2 market has been strengthening over the course of the last two weeks, with the benchmark TC1 AG/Japan trade swinging from a low WS 185 to a peak of WS 330 and closing the current week at WS 290. The fundamentals in this market remain positive, considering the rising demand for oil products (combined with the sanctioning of Russian cargos by western countries), but also the increased expected supply in the Middle East. In fact, we expect about 743,000 b/d of added refining capacity in the region this year, with the 615,000 b/d Al Zour project in Kuwait coming online in the coming weeks.
Outside of the market fundamentals, we have started seeing some fleet related changes that have an effect on current market rates. One of these changes is the increasing number of LR2s observed performing floating storage, mainly off the coast of West Africa but also in the Far East. While this activity could be either operational (e.g. delays in discharge) or commercial (for financial gains), it always results in the diminishing of ship supply, thus leading to tighter lists and rate support.
So far, we have seen 7 LR2s going into floating storage in April, with another 4 for May (Figure 1). We project, based on forecasted inventory builds/draws that the cumulative number will grow to 25 by Q4 before dropping gradually through Q1 2023. With relatively limited additions for the year (16 LR2s projected) and a good deletions schedule, this uptick in floating storage is likely to maintain some limited support on rates in the short term.
Despite this positive development for LR2 rates, there are still some risks to the downside. The trend of clean to dirty cargo switchovers that we have been observing lately (a net 50 since November 2021 - covered in a previous highlight) is likely to change given the overall strong CPP markets although the costs of doing so may delay some owners from transitioning.
Finally, we note that there is still a good number of VLCC and Suezmax newbuildings to be delivered in the year, with the potential to fix clean cargos for their maiden voyages – with a couple already reported doing so this week – and result in less available market cargos for LR and MR tonnage.
Figure 1 –LR2 Floating Storage with Forecast
Source: McQuilling Services, JBC Energy
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