Spike in CPP Atlantic Basin Market
July 28, 2023
Clean tanker market in the Atlantic Basin have found significant support in the past two week with rates jumped almost 50%. The benchmark TC2 (MR2 gasoil UKC/USAC) rates surged from WS 115 on July 18th to WS 175 at the time of printing. The demand increase during the summer driving season certainly is one of the main reasons, but also the tight product supply from refineries in the US. According to EIA, crude input in PADD 1 refineries sharply dropped from an average of 674,000 b/d in June to 625,000 b/d so far in July despite the healthy margins. The lower refinery run could be explained by challenges from extreme weather and changing crude slate. As most refineries rely on air cooling to cool their products, runs had to be reduced to stay within operating parameters. Meanwhile, the reduction in Medium/Sour crude due to OPEC+ cut and the replacement of heavier grades with light grades is also introducing problems during heatwaves. This is because the lighter crudes’ higher yields of naphtha will further stress cooling issues and will put downwards pressure on throughput. In addition, lighter crudes tend to produce fewer middle distillates and less feedstock/VGO. Therefore, although refiners may wish to run greater volumes of light crude to keep these upgrading units at capacity, the cooling issues may force them to cut runs.
The tight gasoline balance has therefore supported tanker demand for TC2 route and thus tightened the number of available tonnage in the US Gulf for TC14 and USG>Carib routes. In the meantime, the lengthening naphtha balance in the West (due to the increase of intaking lighter crude) and recovering demand in the East as petrochemical plants in Asia returned from the maintenance period, could start to see an inflow of West-to-East naphtha flow when arbs open, supporting LR tanker demand. As a result, we are more optimistic on the CPP tanker freight rates in the next two months, compared to their DPP counterparties.
Figure 1: PADD1 Refinery Intake vs. TC2 Freight Rate
Source: EIA, McQuilling Services
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