Spot tanker freight rates are well known for their volatility. This year is no exception and the tanker industry has seen several major “turnarounds” in a number of sectors. Perhaps, one of the clearest examples of this has been in the products tanker market.
During the first quarter of this year, medium range (MR) tankers in the West notably outperformed all product tanker categories in the East.
During this period, MR time charter equivalent (TCE) earnings trading UK Continent-US Atlantic Coast (TC2) averaged close to $14,000/day at market speed (13 knots laden/12 knots ballast), comfortably above the level needed to cover fixed operating expenses.
Firmer returns have been supported by temporary and fundamental factors, such as some weather related delays and disruptions, occasional wide arbitrage to ship gasoline to the US and the rapid growth in US distillate and gasoline exports. These product export opportunities boosted MR earnings above the round voyage calculations on the TC2 trade.
East falls back
In stark contrast, returns for all product tanker categories in the East averaged at their lowest level in over a decade during the first quarter of 2012, below fixed operating costs. This extreme weakness in the product tanker market in the East was underpinned by the toxic mix of weakness in chartering demand and ample supply of spot ships.
Clean tanker rates and earnings in different regional markets moved closer together in the second quarter of this year, as trading conditions in the East started to improve, while the market for MRs in the West started to soften.
These trends accelerated in July, with long range 1 and long range 2 TCE earnings for Middle East-Japan peaking last month at their highest level in nearly two years, while MR earnings for UK Continent-USAC collapsed to the lowest since November 2009.
Taken rates dip
However, the picture is changing again. Currently clean tanker rates in the Eastern markets are in decline, following the slowdown in chartering demand, in part dude to Ramadan.
In contrast, MR charter costs in the Atlantic Basin are on the upward path amid some tightening in tonnage availability (although they still remain below fixed operating costs).
The latest developments are simply yet another example of the volatile nature of spot freight rates and if current trends continue, we may see another “change of fortunes” in the West versus East.
However, freight rates in the West could find strong support if we are to see a very active hurricane season, while the third quarter of each year is usually the strongest for the products market in the Middle East and the Asia Pacific.