Elevated freight rates for clean product tankers are deterring Asian gasoil cargoes from sailing westwards even as Singapore prices for the industrial fuel reach steep discounts against northwest European rates, trade sources said.
Freight rates have soared to new highs in recent weeks as nearly 300 oil tankers globally were placed off limits by operators trying to avoid violating U.S. sanctions on Iran and Venezuela.
That has made arbitrage economics unworkable, traders say, potentially leading to a stockbuild in Asia, which in turn could depress gasoil refining profit margins in the region.
The premium for Northwest European gasoil over Singapore values for November delivery hit a 10-month high of $34 per tonne this week, typically opening the arbitrage trade window for fuel to be pulled into Europe from southeast Asia.
But rates to secure vessels to ship oil have soared as the sanctions took roughly 3% of the global tanker fleet out of the market, according to industry sources and Refinitiv Eikon data.
“The East-West gasoil arbitrage is closed due to the high freight rates,” a Singapore-based gasoil trader said.
“Freight on LR2 from Arab Gulf or the East to UKC is more than $7 per barrel,” he said, referring to long-range 2 vessels that can carry 80,000-160,000 tonnes of clean products. “It does impact the gasoil arb flows to Europe from Asia.”
Clean products refer to gasoil, jet fuel, naphtha and gasoline, while crude and fuel oil are known as dirty products in the industry.
“Typically, the freight rates should be around $3 per barrel for the arb to work,” the trader said, though he added the number of factors in operation made it hard to specify an exact freight level.
Peaking dirty tanker rates had already prompted some shipowners to switch from carrying clean products to dirty cargoes, according to shipping industry sources and analysts.
“Around eight ships is what I’ve heard got converted to dirty, but there could be more. This in turn only pushes the market up on the LR2s due to supply-side limitations,” one shipbroker said, declining to be identified as he was not authorized to speak with media.
The markets for very large crude carriers (VLCCs) and dirty product tankers have picked up “a lot”, especially in the West, since Washington imposed sanctions on two subsidiaries of China’s shipping giant COSCO last month, traders said.
“Some LR2s went dirty to catch the good market. From Friday till today, rates have increased by 200 Worldscale points roughly on both LR2 and LR1s,” the Singapore-based ship broker said, referring to points on the pricing index operated by the Worldscale Association.
“But for the clean tankers, it all started only last week.”
Long-Range 1 (LR1) vessels can carry 50,000-80,000 tonnes of clean products at a time.
Source: Reuters (Reporting by Koustav Samanta Additonal reporting by Jessica Jaganathan Editing by Florence Tan and Jan Harvey)