Weight of Freight: Europe can make or break USG tanker rates in 2024

Elevated European demand for US crudes should provide continued support for Aframax and Suezmax rates into 2024, although the strength of Europe’s economy will dictate whether the record highs of 2023 will repeat.

The first quarter of 2023 was historically strong for US Gulf coast crude tanker rates, as new trade flows to Europe rose after the EU banned imports of Russian oil in December 2022. The average rates for 90,000t Aframax and 145,000t Suezmax shipments of WTI in the period were $4.85/bl and $3.14/bl, respectively, nearly double what they were in the first quarter 2022, according to Argus data, as the US replaced Russia as Europe’s top crude supplier. Argus’ 90,000t Aframax rate accounts for the lack of overage costs for cargoes over 70,000t out of the US.

But the global tonnage balance has largely adjusted to the new trades, and falling refining margins in Europe indicate 2023’s historically strong first quarter for tankers is unlikely to repeat, as decreasing demand in Europe for oil would crimp tanker demand on the US Gulf coast.

Already, midsize tanker rates in November were suppressed as shrinking margins muted transatlantic demand for WTI, the primary US crude in Europe. The 3-2-1 crack spread for North Sea Dated crude in northwest Europe held between $30-$40/bl during July-September before collapsing and then making a modest recovery to just under $20/bl in November. Some refiners faced margins in the single digits, according to traders.

The narrowing margins came as the eurozone manufacturing sector contracted for the 17th consecutive month in November, though at a lesser rate than in October.
 

A driver of demand

European demand can have an especially large impact on Suezmaxes and Aframaxes, which have hauled about 70pc of the 1.8mn b/d of crude flowing from the US to Europe through November this year. High demand for US crude powered a midsize tanker rally in October, countering the downward pressure from Opec+ cuts on the global tanker market in August and September. 

But as margins fell, Aframax rates to Europe sank to $4.05/bl on 30 November from a five-month high of $6.25/bl on 31 October, limiting the upside during what is typically the strongest quarter of the year for crude tankers, especially compared with 2022. In October-November this year, the 90,000t rate averaged $4.60/bl with a peak of $6.25/bl, compared with an average of $5.54/bl and a peak of $7.92/bl in the same period last year. That indicates a weaker pattern may be in store for the market into 2024.

For Suezmaxes through October and November this year, the rate averaged $3.17/bl with a peak of $4.45/bl, down from an average of $3.78/bl with a peak of $5.25/bl over the same period last year.

While Suezmaxes and Aframaxes fell drastically, declines for very large crude carriers (VLCCs) were more muted, with additional support from more voyages to Asia-Pacific amid Opec+ production cuts. US-Europe rates for 270,000t cargoes were more stable and rangebound between $2.23/bl and $2.49/bl in November, showing that European demand is an increasingly powerful driver of midsize tanker rates.

However, the longer voyages US crude must travel to Europe compared with Russian crude before it was sanctioned provide a higher floor for rates than before the Russia-Ukraine conflict, offsetting some of the tepid demand. For example, the year-to-date low for an Aframax shipment to Europe so far in 2023 was $2.08/bl in September, which was nearly 60¢/bl higher than the average rate in 2021.

Additional support will come from an aging tanker fleet and historically low orderbook, with only 10 new Aframaxes and seven new Suezmaxes set to be delivered in 2024, according to shipbroker BRS.

Price cap could change the story

The G7 price cap also could have a substantial effect on tanker rates and vessel availability, especially if Urals falls and remains below $60/bl and entices shipowners back to the Russian trade.

Since July, the Russian medium sour crude has mostly been above the price cap, rerouting mostly Suezmaxes and Aframaxes from the Russian trade and pressuring rates lower in other regions.

But the reverse could happen if Urals were to drop and remain below $60/bl. In this scenario, shipowners could return to Baltic and Black Sea trades, straining tonnage in other regions and lifting the price of freight.
 

EU ETS adds to shipping costs

Europe-bound freight bills will receive an additional cost amid shipping’s inclusion into the EU Emissions Trading System (ETS), a cap-and-trade program that, beginning 1 January, requires shippers that call at EU ports to pay for the carbon their ships emit.

Argus estimates that the regulation will add about 3-4pc to freight bills involving an EU port next year.

Fluctuations in these costs, which will come in addition to moving freight rates, can make or break a trade. The Worldscale Association, which publishes port-to-port flat rates that underpin much of spot tanker chartering, has opted to exclude EU ETS compliance costs in their flat rates.

Author Tray Swanson, Market Reporter - Freigh

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