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Opportunities in the LR1 Space

Oct. 8, 2021

Since our Tanker Market Outlook back in January we have placed emphasis on opportunities that may arise in the LR1 sector.  This often-overlooked tanker has the versatility to compete with the larger LR2 on some trades, as well as with MR2s for smaller cargo stems.  The trades in the LR1 space are far less consolidated than the larger tankers given it is flexible enough to operate in many areas and under many scenarios.  Despite that, we have identified some “pockets” of interest.

Overall, the global LR1 ton-mile demand is projected to grow on average by 1.1% in 2021, followed by a 5.5% in 2022.  Adding to this tighter utilization scenario is the fact that the current orderbook for this type of tanker is at 0%, although there is an expectation that, should opportunities materialize, this percentage could quickly change.

LR1 tankers are expected to benefit from the naphtha balance in the Middle East, which is projected to remain flat through 2025 at about 950,000 b/d, despite refinery additions in the region, which are likely to be geared more towards gasoline production.  Given Asia’s (Far East + S.E. Asia) demand for naphtha is projected to grow by about 189,000 b/d in the same period, charterers may only have the option for smaller loads from the Middle East to the east, for which LR1s could be the ideal solution.

Staying on the naphtha trade, the lengthening balance in the Atlantic Basin will play a role in the growth of the Southern Europe to the Far East trade, for which ton-mile demand is projected to increase at an average of 2% through 2025.  The strong Med/East trade will benefit LR2 tankers as well, but increased utilization in the larger sector on longer haul voyages could mean more “room” available for LR1s to compete. 

Taking everything into account, the tighter utilization of the LR1 sector is likely to lead to it outperforming its competition.  In fact, when comparing a blended TCE for an ECO LR1 to a typical MR2 triangulation TCE, we see consistently higher earnings extending to Q4 of 2022 (Figure 1, left graph).  Even if we factor in the current asset values, we still see LR1s showing better returns on the percentage basis (Figure 1, right graph).

Figure 1 – LR1 vs MR2 Earnings Comparison

Source: McQuilling Services