Crude and product tanker markets have been under heavy pressure so far in Q4, with clean West rates currently the only bright spot. Whilst markets are frequently volatile, persistently weaker returns in the middle of a traditionally strong fourth quarter are causing concern. What are the demand factors behind weaker rates and earnings?
Aframaxes have been under the biggest pressure on the crude side. Kpler data shows global crude tonne miles for this size group are down by circa 2.5% year-on-year during the first ten months of 2024, despite the start-up of the expanded TMX pipeline and an uptick in trade out of the US. Here, the largest decline in tonne miles have been seen out of Russia; yet, Red Sea attacks and maturing crude production in Asia have added further downward pressure, whilst recent outages in Libya and field maintenance in the North and Caspian Seas have also temporarily reduced demand.
Suezmax demand has remained more or less flat year-on-year. A notable decline has been seen in tonne miles out of the Middle East, primarily due to rerouting via the Cape of Good Hope, with charterers opting more frequently for larger VLCC stems. An even bigger drop has been seen in Suezmax demand out of Russia, with volumes sharply down since May. However, the above has been offset by significant increases in tonne miles out of the US Gulf and Latin America, where exports have been particularly strong in recent months.
In contrast, VLCC demand is up modestly year-on-year, with less trade out of WAF/USG and lower demand into China being offset by increases in shipments out of Latin America, whilst smaller gains earlier in the year were also seen in VLCC shipments from the UKC.
The picture is more complex for the clean tanker market. Averaging data for the first ten months of this year, LR2 tonne mile demand is notably up year-on-year, much smaller gains are seen in MR demand, whilst LR1 and Handy demand is modestly down. Increases in LR2 demand are largely driven by diversions via the Cape of Good Hope and absolute gains in AG/India-West trade. However, if we zoom into the data in greater detail, LR2 tonne miles surged during the first five months of the year but have since been under downward pressure due to dirty-to-clean switching. LR1s have also suffered from this development. MRs and Handies have been negatively impacted by lower clean exports out the UKC/Med, most notably in recent months amid heavy European refining maintenance and declining exports into West Africa. In addition, Handies have been further pressured by rising competition from MRs. In the East, MRs have suffered from lower intra-regional CPP trade. Across all clean tanker segments, a clear decline in tonne miles has been observed for shipments out of Russia.
Whilst some factors behind weaker rates are individual for specific segments, there are a few recurrent themes. A struggling Chinese economy has impacted both crude and clean tanker tonne miles and the changes here are fundamental. Dirty-to-clean switching has been a major blow not just to LR demand but has also led to a recalibration of regional MR freight in the East. This trend is also likely to be on a structural side; yet, any substantial increase (including seasonal) in the crude tanker market relative to clean will limit the attractiveness of switching. The decline in Russian crude and clean exports hit the crude and product tanker market in equal measure. The drop in volumes here is in part seasonal, driven by OPEC+ production strategy, seasonal demand and refinery maintenance; yet, frequent drone attacks coupled with challenging export economics have caused more permanent damage to refining margins. Going forward, fundamental changes are here to stay. Although seasonality will change, offering some support; nonetheless, total demand may struggle to return to recent peaks.
Data source: Gibson Shipbrokers