LR2 Switchover Update
May 31, 2024
LR2 switchovers play an important role in tonnage supply, as both Aframax and LR2 fleet sizes are directly impacted by these activities. Tracking by our proprietary commercial database, we have identified a net increase of 51 LR2s joined the dirty-trading market from Sep 2022 to Dec 2023, in line with the huge earning advantage of dirty-Aframaxes amid the Russian sanction impact. The surged conventional crude tanker demand in the Atlantic Basin as well as new demand to export Russian crude from Western ports to Asia have pushed the average earnings for the Aframax AG>Singapore to US $60,600/day during this period, much higher than earnings for Eastbound LR2 trades at US $43,200/day.
Due to the Red Sea tension and its impact on tanker rerouting through the Cape of Good Hope, LR2 demand for East-to-West trades jumped on the 34% increase in sailing distances but also a rapid increase in refined product exports from the Middle East (new and returned capacity from maintenances). As a result, LR2s saw significant earning support and outperformed crude tankers; a simultaneous reduction (net 23) in the number of dirty-trading LR2s was captured since Jan 2024. Given the strong LR2 fundamental, we expect this trend to continue for dirty-trading LR2s returning to the CPP fleet in the coming months. However, compared to clean-to-dirty when shipowners directly load crude or fuel oil into the clean tanks, the dirty-to-clean switchover process takes many more days and is usually costly (tank cleaning and opportunity costs). Owners also face some limitation on available CPP to carry for the first 1-3 voyages – usually clean condensate or low-quality diesel.
Figure 1 – LR2 Switching to Trade Dirty Figure 2 – AG/East TCEs
Source: McQuilling Services
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