In Hellenic Shipping News 02/06/2015
The refinery expansions and new investment in this segment by Middle Eastern countries, which have already started to affect the market, is expected to have a positive effect on the LR product tanker segment. In its latest weekly report, shipbroker Charles R. Weber said that “this month marked the commencement in earnest of much anticipated new refineries in the Middle East. On the Red Sea, Yasref has reportedly boosted utilization of its new 400,000 b/d Yanbu refinery to 80%. The greenfield refinery was completed in December and test cargoes commenced in January. In the UAE, Adnoc’s new 400,000 b/d expansion units at its existing Ruwais refinery have boosted total nameplate capacity to around 815,000 b/d with utilization rates reportedly having ramped up to 80% to 90% in recent days following the startup of expansion units and commencement of export cargoes in February and April, respectively”.
According to the shipbroker, “the fresh refining capacity builds on a major expansion of regional refining capacity which commenced in 2013 with the completion of Satorp’s 400,000 b/d Jubail refinery on the Arabian Gulf coast. With the Yanbu and Ruwais additions more heavily export?oriented than Jubail, which has been more heavily absorbed by regional product demand, the impact on regional LR tanker rates should be positive. Beneficiary trade routes are expected to be those from the Middle East to demand centers in Europe and Latin America and to transshipment and storage hubs in the Caribbean. LR1s are expected to net the greatest gains due to infrastructure restrictions at European ports which disfavor larger tonnage, in line with the trend that coincided with the startup of substantial exports from Jubail”.
CR Weber added that “LR2s will likely also benefit, but to a lesser extent as drawing LR2s presently trading in dirty markets back to clean trades against a wide disparity between dirty and clean earnings complicates the relative economy of scale. For their part, MRs lack the efficiency of scale to be heavily sourced for ex-Middle East product trades and newer units MR units are expected to remain heavily oriented to trading in the Atlantic basin with older units servicing intra-Far East regional trades”.
While bringing new opportunities to LRs, the increased flow of products into the European market brings potential disadvantages to MRs. CR Weber noted that “European refining margins turned markedly stronger amid the collapse of crude prices during 2H14, leading to higher regional utilization rates which have heavily benefitted MRs by pushing more gasoline to the US East Coast amid stronger US gasoline demand while also pushing Baltic distillate exports to destinations further afield than their earlier destinations in Europe. Additionally, fewer triangulated USG-UKC/UKC-USAC/USG trading patterns among MR units have decreased the class’ trading efficiency to the benefit of earnings. European refining margins, however, are largely expected to come under negative pressure during 2H15, leading to rationalizations in the form of shuttered capacity and lower utilization rates by 3Q16, in our view. Confirmed refinery closures in Europe thus far amount to 320,000 b/d by end-2016, though greater capacity reductions are likely”.
The shipbroker went on to note that “the trading impact on MRs thereof is likely to be in a reduction of demand on the UKC-USAC route with USAC imports partially shifting to originations at transshipment hubs in the Caribbean. Simultaneously, changing product export duties in Russia mean that refiners there are less protected from international price dynamics, putting refining capacity supporting Baltic area product exports at risk. While reduced MR demand in the European and Baltic markets could lead to rate downturns there, there is also the potential for Caribbean loading areas to increasingly compete with the USG market for tonnage, benefitting overall regional rate heath and allowing owners trading in the USG market to seek stronger rates for Europe-bound voyages than the route’s present back?haul status permits; these factors could potentially compensate for European/Baltic demand erosion. Refinery rationalizations elsewhere represent only positives and recent analysis by Energy Security Analysis (ESAI) notes that by end-2016, global refinery closures could be as high as 2Mnb/d, far higher than the previously announced 1Mnb/d. Those in the Far East could amount to around 745,000 b/d, raising prospects for both LR2 tankers for AG-FEAST voyages and MRs for regional distribution, while Australia has confirmed the contribution of a further 100,000 b/d, which will heavily favor increased imports on MRs (around 10-12 per month)”, CR Weber concluded.
