February 20, 2023

Clean freight rates rise but so far, the “Russia effect” is muted

Clean tanker rates lifted from multi-month lows last week. The fundamentals of the clean market were arguably not as bad as the decline in rates suggested so an increase was due. But, with over 40% of Russian clean exports since the EU ban heading to the Mediterranean and Black Sea, expectations rates will push on higher will be tempered.

In Europe, MR rates from UKC to USAC (TC2) rose $5.9/bbl briefly last week, up $3/bbl, before edging down slightly at the end of the week. On the other side of the Atlantic, rates from the US Gulf to Europe saw a similar increase. Rising freight has kept the transatlantic gasoline arbitrage firmly shut, even as the price spread between Europe and the US East Coast widens. The increase in LR rates from the Middle East was also significant with rates for LR2s to Japan rising $3/bbl to $6.4/bbl.

The increase in clean freight coincided with the implementation of the EU import ban, but as we previously indicated, this won’t have been driven by any change in the fundamentals related to Russia. However, anticipation of changes and firming sentiment, will have been factors which supported the rate rise.

The fundamentals behind the decline in rates from December; a build in MR tonnage in the US Gulf, the slump in exports from Eastern Asia and weak naphtha flows on LR2s were arguable not as bad the fall in rates suggested. As some of these issues have eased, the market was primed for rates to rise. Adding on top of this uncertainty is the Russia effect, a still unclear multiplier of clean tanker demand. Charterers will be aware that potentially longer voyages from Russia this month will drain the region of more tonnage that usual, encouraging some to fix ahead and/or agree higher rates. But based on exports since the ban, this effect may not be as large as had been expected, with a high share remaining in the Black Sea and Mediterranean.

So far, since 5 February, 41% of Russian exports were shipped to destinations in the Mediterranean and Black Sea, with just 10% heading to West Africa or Latin America, only slightly higher than the 9% over the month prior to the EU ban. Not all of the cargoes heading to the Mediterranean will remain there, however. Two USLD cargoes from the Baltic are signalling Gibraltar but this is unlikely to be their destination. A further two naphtha cargoes are en-route to Malta but are ultimately likely destined for Asia. Even so, the expected surge in ton-miles for Russian clean exports was primarily driven by voyages to West Africa, Latin America and also the Middle East to a lesser extent. If the share of exports to these regions remains low, there will be a much smaller lift in rates this year.

Russian clean product exports by destination trading region

Source: Kpler

*Pre-ban period is 1 Jan 2023 to 4 Feb 2023, Post-ban period is 5 Feb 2023 to 19 Feb 2023

But, it is still just two weeks in, post ban and so far in February, around 33% of Russian clean exports don’t have a confirmed destination. This doesn’t mean the cargo has no destination, but as yet it has not been clarified in Kpler’s data. This is not an unusually high share for the prompt month, but serves as a reminder that it will take time to fully understand what the change in freight will be.

Further denting clean tanker demand prospects has been the use of Suezmaxes. Since January, three Suezmaxes have loaded Russian naphtha bound for Asia. This is the first use of fully laden Suezmaxes to load clean products from Russia since 2019.

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