LR2 Fleet Development Updates
July 15, 2022
The cumulative net fleet growth for the LR2 sector in 2022 is expected to come at negative 5, as a result of a number of factors that are affecting ship supply in the sector, both fundamental and structural.
Deliveries for the year are limited to an expected 17, significantly less than the average of 25 per year seen in the last decade. On the deletion side, we have counted 4 LR2s so far in the year and expect this number to double by December (Figure 1). This relative “discipline” of LR2 tanker owners is partially responsible for the much better returns seen in the CPP market compared to the DPP one.
Regarding structural changes to the fleet, we have seen a persistent trend since Q4 2021 of LR2s switching to dirty trading, an effect that was exacerbated after the war in Eastern Europe and the volatility that followed in the DPP markets. A total of 23 LR2 tankers were “removed” from the trading fleet from the beginning of the year until May, playing a major role in the rate increases we saw in the past few months for the sector. Of course, these rate increases had the opposite effect on owners’ decisions, and indeed we began seeing ships switching back to clean trading, counting a total of 7 for June and an additional 2 for July. Given the high cost of the transition from DPP to CPP and the recently weakening rates, we expect this trend to flatten out in the near term.
Additional support on the supply side of the LR2 fleet came from a spike in floating storage we began observing as early as March. We have counted a total of 12 LR2 going into floating storage from April to June and expect a few more to be added in the following months. Given the nature of clean products, we expect the trend to reverse in Q4 2022, which combined with expected deliveries is likely to steadily increase the total trading fleet.
Finally, expanding naphtha demand in the Far East is likely to continue supporting flows from the Middle East on LR2 tonnage, with the product balance in the region lengthening in the coming months. In the West of Suez, increased refinery runs in Europe have supported gasoline balance, with exports to the US and West Africa forecasted to continue strong in the short term, benefitting both LR and MR tonnage.
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