VLCC freight rates faced pressure in 2024 due to weaker Chinese crude imports, leading to a decline in long-haul trade. Conversely, shorter-haul routes witnessed increased activity, reports Breakwave Advisors.
East-West LR2
In November, East-to-West LR2 middle distillate shipments reached a record low, driven by a closed East/West arbitrage resulting from an oversupply of diesel in Europe.
This oversupply was partly attributed to increased diesel exports from the United States. At the same time, Asia’s middle distillate imports experienced a significant surge, redirecting supplies from the Middle East Gulf (MEG) and India toward Asian markets.
Recently, however, we have observed a rebound in East-to-West voyages, as also evidenced by the month-on-month increase in Cape of Good Hope (COGH) transits.
The currently marginally open East/West arbitrage suggest that East-to-West flows may continue to recover, supported by a pressured LR2 East-to-West freight rates.
If East/West flows persist, longer average voyage mileage will tighten LR2 availability and in turn support East/West LR2 freight rates.
Aframax Rates
TD25 rates surged in late December as crude exporters from Texas and Louisiana rushed to avoid end-of-year ad-valorem tax, driving Aframax demand and limiting vessel availability in the US Gulf.
Aframax employment on transatlantic routes rose by 17% month-on-month, boosting tonne-mile demand on TD25.
An uptick in Aframaxes departing to Europe with PADD 3 crude in the first week of January could suggest a potential resurgence in momentum.
Reports of robust fixing activity on Aframaxes for mid-January loads to Europe (Argus) further support a more optimistic outlook for Aframax employment.
However, expectations of limited upside on TD25 rates grow, as the number of Aframaxes ballasting to the US Gulf spikes, increasing vessel availability.
Additionally, Aframax employment on TA routes may face headwinds as a parallel rise in tonne-mile demand for VLCCs from PADD 3 on the TA route creates competitive pressure on Aframax’s earning potential.
Narrowing Differential
With the Q4 surge in TA diesel flows robust TC14 (USGC-to-NW Europe) rates enticed MRs to reposition to the USGC from NW Europe, a highly unusual move (see light blue shaded area).
The incentive for this repositioning was the wide differential between TC14 and TC2 freight rates, as vessel supply pressure in Europe and low demand kept TC2 (NW Europe-to-US Atlantic Coast) rates at record-lows.
The narrowing differential between TC14 and TC2 freight rates has now served to stem the tide of MRs repositioning from NW Europe.
As a result, prompt availability on the continent is increasing once again, adding supply-side pressure to a market in need of relief as European gasoline exports remain lackluster.
Did you subscribe to our daily Newsletter?
It’s Free Click here to Subscribe!
Source: Breakwave Advisors
