Despite heavy newbuilding ordering activity, the LR (Long-Range) of the product tanker market is still offering solid demand/supply fundamentals. According to the latest weekly report from shipbroker Gibson, “for a few years now there has been a wide spread belief that expanding refining capacity in the Middle East would offer strong support to the product tanker market. This speculation supported stronger interest in newbuilds. 2013 saw 54 LR2 orders, compared to a total of 38 units ordered during the previous five years. Similarly, 28 LR1 orders were placed in 2014, versus just 8 ordered between 2011 and 2013”, said the London-based shipbroker.

He added that “these orders were largely placed at a time of weakening tanker earnings, with returns generally easing over the course of 2013 and averaging just $10,000-11,000/day at market speed between November 2013 and June 2014. However, the LR2/LR1 market gradually firmed during the 2nd half of last year to the heights not seen since 2008. As expected, higher returns were supported by stronger long haul product exports out of the Middle East, once the 400,000 b/d Jubail refinery in Saudi Arabia reached full scale operations in late summer 2014. There also had been a notable increase in spot fixtures for larger product carriers loading East of Suez in 2014 relative to the previous year (well above volumes out the Middle East). The picture is similar in the West, particularly for LR1s, where the most significant increase has been observed in trade from the UK Continent to West Africa”, the shipbroker noted.

The report added that “the recent strength in LR2/LR1 earnings is encouraging further investment in newbuild tonnage. Since the beginning of this year, already 17 LR2 and 12 LR1 orders have been placed. Despite this fresh wave of ordering, LR2/Aframaxes and LR1/Panamaxes still have the smallest orderbook as a percentage of its existing fleet at around 12.5%. This is due to a minimal investment in the dirty segment in these size groups in recent years, which in a way helped to “offset” stronger ordering activity for LR2s and LR1s. The changes in trading fleet this year are likely to be marginal, with very few deliveries expected to enterthe service. The recent migration of several LR2s from the clean to dirty trade will further limit the trading LR2 fleet this year, particularly if more units follow suit to take advantage of the current strength in the Aframax market. At the same time, demand is expected to increase further, once the two 400,000 b/d Yanbu and Ruwais refineries in the Middle East reach full scale operations over the course of 2015”, Gibson said.

However, the outlook in the medium term is more uncertain. The shipbroker said that “the planned start-up of the 400,000 b/d Jazan refinery in late 2016 is expected to be delayed by around a year (if not longer) and this will push back export growth potential for product tankers. The supply side as of now appears balanced to weather this delay. However, a lot depends on how many more orders we see in the near term. If ordering activity continues at similar levels seen over the past couple of months, by year end the number of orders in each segment will reach record annual highs”!

Meanwhile, in the crude tanker market this week, in the Middle East, Gibson said that “VLCC action there wasbut the end result was that rates remained at virtually unchanged numbers, remaining. Conference in the very low ws 50s to the East, and at ws 27/28 to the West via suez and cape respectively. Over two thirds of the anticipated March programme has now been taken care of and availability seems fat enough to cause little concern for charterers, though any upping of the pace before the end of the game would give Owners some renewed hope, at least. Suezmaxes started slowly, but picked up as the week progressed with the stronger West African market boosting sentiment and presenting ballast opportunities to take advantage there. Rates shifted up into the low ws 90s to the East and at up to ws 52.5 to the West too. Aframaxes failed to gain any real grip on merely modest enquiry. Rates remain in an 80,000 by ws 105/110 bracket to Singapore and look set to stay there for a while”, Gibson concluded.

Nikos Roussanoglou, Hellenic Shipping News Worldwide