Viewpoint: European tanker rates meander into 2025

Market: Freight
18/12/24

European Medium Range (MR) and Handysize tanker rates are set to remain subdued in 2025 as a continued shortfall in US gasoline demand and west Africa's growing independence from imports leaves MRs with little to do.

Europe has become increasingly able to survive on domestic gasoline production in 2024, because of modest economic growth and frequent refinery maintenance procedures. This has kept prices high and made gasoline less competitive in export markets, which could be set to continue in 2025, potentially keeping exports in line with 2024.

European gasoline exports on MRs to the US in 2024 dropped to the lowest since 2020. The average in the January-November period was just 206,000 b/d, down from 226,000 b/d in all of 2023 and almost as low as 193,000 b/d in 2020 during the Covid-19 pandemic. Exports in 2025 will probably remain close to 2024.

This drop pushed MR rates to the lowest since 2021, although they have not yet moved back to the levels that were standard before the Russia-Ukraine war and associated sanctions, which led to sweeping changes in the tanker market in 2021.

The 2024-average rate between the UK Continent and US Atlantic coast was $26.67/t, down from $32.63/t in 2023 and $37.94/t in 2021. But this was still significantly above the 2019 level of $19.30/t. The time charter equivalent (TCE) rate — a measure of the money a shipowner generates after fuel and other costs — on the route was around $13,250/t in 2024, which was above shipowners' typical operating cost of $5,000-7,000/d.

Rates in 2025 seem likely to hew closely to 2024 levels as gasoline fundamentals in Europe and the US serve to limit the transatlantic trade.

In Europe, a high amount of planned and unplanned refinery maintenance and domestic consumption served to keep European gasoline prices comparatively high and limited US demand. At the same time, US production of gasoline increased, making it less reliant on imports. This has been particularly apparent in the fourth quarter of 2024 when European gasoline exports hit a 52 month low and 2025 will probably see the same pattern.

In west Africa, the second key MR market, the 650,000 b/d capacity Dangote refinery in Nigeria is now producing gasoil and gasoline, which led to a decline in spot MR demand from Europe. Dangote is yet to operate at full capacity but continues to ramp up and west Africa will become increasingly able to cover demand with domestically-produced clean products. This will mean the MR market in 2025 will be focused almost exclusively on the slowing Europe to US route, which will keep rates under significant pressure.

Diesel doldrums depress LR2s

Long Range 2 (LR2)-sized diesel/gasoil rates into Europe should have hit a peak in 2024 as tankers had to divert around the Cape of Good Hope to avoid attacks from Yemen-based Houthis in the Red Sea, and the Mideast Gulf remained Europe's primary diesel supplier. But instead the market slumped and this trend seems set to continue in 2025.

The fourth quarter in particular has been lacklustre with rates half of what they were at the same point in 2023.

European diesel imports are particularly subject to east Asian naphtha demand, as both trades compete for tankers in the Mideast Gulf. East Asian naphtha demand has been slow and is set to remain so in 2025 as downstream margins have weakened far enough that many of the region's refineries have shuttered operations temporarily.

At the same time, several very large crude carrier (VLCC)-sized diesel shipments on the route in August boosted European inventories and stunted demand through the third and fourth quarters. European importers switch to US MR-sized diesel cargoes when LR2 freight rates rise, which will again create a ceiling for LR2 rates in 2025.

By Erika Tsirikou

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