Key takeaways from this report:
Dirty – East of Suez: VLCC freight rates pressured by lower voyage distances despite higher voyage counts
Clean – East of Suez: East-West LR2 middle distillate voyages bounce back from record lows, supporting longer voyages via COGH
Dirty – West of Suez: AB Aframax rates face supply headwinds amidst fading year-end rally in PADD 3 crude exports
Clean – West of Suez: Narrowing rate differential stems MR migration from Europe-to-USGC, increasing MR supply in Europe
Dirty – East of Suez: VLCC freight rates pressured by lower voyage distances despite higher voyage counts
VLCC freight rates were under pressure in 2024 as weaker Chinese crude imports have dented long-haul trade, while short-haul routes have picked up
Average voyage distances for VLCCs transporting crude/condensates (excluding Iranian and Venezuelan grades) fell sharply y-o-y in 2024, back towards a multi-year low set in 2022
➔ A major component of the drop in average distances is a drop in the number of US-China voyages
➔ The impact of this on the wider VLCC market has been softened by VLCCs finding employment on other shorter, lower volume routes (e.g MEG-Southeast Asia)
Looking ahead to 2025, an escalation of trade tensions between the US and China, may limit long haul VLCC trade and therefore lead to a concentration towards relatively shorter haul routes such as MEGNortheast Asia
➔ This could likely keep a lid on rates, especially if OPEC continues to follow a path of moderating supply increases this year
Clean – East of Suez: East-West LR2 middle distillate voyages bounce back from record lows, supporting longer voyages via COGH
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
Dirty – West of Suez: AB Aframax rates face supply headwinds amidst fading year-end rally in PADD 3 crude exports
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 grows, 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 earning potential
Clean – West of Suez: Narrowing rate differential stems MR migration from Europe-to-USGC, increasing MR supply in Europe
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 lacklustre
It is unlikely that MR tonnage will be enticed to the USGC any time soon, as availability is increasing amidst lacklustre demand in the region
➔ The cold weather hitting PADD 1 could increase demand for diesel, leading to a higher domestic requirement and less seaborne exports from PADD 3, especially as PADD 3 diesel stocks are very low (EIA)
Data Source: Vortexa