April 17, 2020
In previous weeks we looked at opportunities in floating storage for the clean sector and specifically LR2 tankers. This week we are taking a quick look into new potential trades and ton-mile demand for the same sector -specifically for gasoil cargos.
This arises from the contango market and the natural arbitrage that seems to be emerging between the Far East and Europe. Using the latest available data, we see how refineries in the Far East have already started to bounce back to production along with easing of restrictions due to the coronavirus spread. Refinery utilization rates are increasing in April from a bottom in February. At the same time, Europe is likely seeing the lowest utilization rates in April at about 50% (Figure 1). This gap creates a “window” of opportunity for traders to purchase new gasoil production from the Far East and sell in Europe after a voyage that lasts over a month, thus hitting the “sweet spot” right when European plants are projected to start increasing their operations, but still not producing large quantities.
There are a few reasons we project a development of this trade from the Far East to Europe. First and foremost, it is the economics of it as described in the previous paragraph. In addition, we believe that while refineries in Asia (mainly China) are starting to ramp up crude intake, the rest of the economies in the region will likely need some time to “catch up”, thus creating an initial surplus of products like gasoil. We also know that the Chinese economy is slowly transitioning from an industrial one, to one that is more services and consumer-oriented and with this creating less demand for specific products. Lastly, on the other side of the trade, we project that Europe will likely lose product volumes from the Middle East as the latter is showing reduced refinery utilization until June. We believe that part of that may be a conscious decision to refine less crude in order not to give up market share that has been obtained recently, especially during the short-lived price war.
To sum up, products like gasoil and jet fuels are likely to find their way on LR2 tankers for long-haul voyages from the Far East to Europe. The tanker seems to be the obvious choice for such a voyage as the economics (and sensitive timing) of these potential trades are such as to produce greater returns with greater quantities traded.
Figure 1 – Refinery Utilization and M-O-M Changes by Region
Source: McQuilling Services