Asian LR2 premiums over LR1s at record high on floating storage, India export

LR2

Asian Long Range II tanker premiums over the LR1s on the Persian Gulf-UKC route hit a record high of $1.5 million Wednesday as the rates rose sharply to meet strong demand for gasoil and jet fuel loadings from both India and the Persian Gulf along with floating storage.

At least a dozen LR2s have been taken with an option for floating storage this week, mostly near Singapore for up to six months, taking away a substantial part of supply from the spot market, chartering executives, brokers and owners said.

Since the LR2s are the preferred tanker size for storing clean products, their premium has increased fivefold since mid-February, according to S&P Global Platts data. The premium alone at $1.5 million is equivalent to what the LR1 rate on the Persian Gulf-UKC was in late September, the data showed.

As Saudi Aramco steps up crude production at a time when demand is weak, there is also a large surplus of cheap oil products such as jet fuel and gasoil being held by trading companies and its movement and storage is supporting rates, they said.

A Scorpio Tankers-controlled LR2 has been placed on subjects by ATC Wednesday at a substantial $4.5 million for April 25 gasoil loading on the Persian Gulf-UKC route, a significant $300,000 higher than the previous fixture and a level not seen since mid-October, several sources said separately in the Middle East and Singapore.

Strong demand to load middle distillate cargoes from India due to a nationwide lockdown, which in turn has reduced domestic demand, is the single most important factor supporting rates because it is also pushing up floating storage.

“The LR2s are being taken at crazy rates and a part of the floating storage is of products purchased from India,” one broker said.

“One of the biggest casualty of the coronavirus is the airlines industry,” said a source with one of the LR2 owners. Due to the cancellation of thousands of flights for several weeks, even months at a stretch, demand for spot cargoes of jet fuel is very limited and prices have declined.

Trading companies including those with term contracts are snapping up these volumes either due to prior commitments or because they see a window of opportunity due to a contango, the source said.

Several oil majors and trading companies such as Vitol, ST Shipping, which is the maritime arm of Glencore, Chevron, Vitol, Shell and BP have either taken or are seeking LR2s with a storage option.

“There is more jet fuel storage, it seems,” a broker in Singapore said. The STI Carnaby and the LR2 Eternity were chartered for up to six months from April 5 and April 10 by ST Shipping at a daily rate of $40,000 and $44,000 respectively, sources said.

However, not all such deals are fructifying. BP had placed two LR2s, the Bw Larissa and the Celsius Everett, on subjects at a daily rate of $50,000 and $46,750 respectively, but later released the ships.

“The deals did not work out,” said a source tracking the developments.

At current rates, it may cost a trading company $1.5 million just as tanker chartering cost to hold the refined oil products for a month and there is uncertainty on how long it needs to be held, said another broker in Singapore.

India spurs storage deals

Indian refineries are also trying to get rid of their gasoil and jet fuel surpluses at dirt cheap rates as an unprecedented lockdown amid the coronavirus pandemic has reduced demand. It is a cataclysmic situation where the shutdown implies no demand for jet fuel and with no vehicles on roads, there are fewer gasoil and gasoline requirements.

“India is exporting cargoes right, left and center and there is no disruption for exports from Sikka and Vadinar,” another broker said.

There are several jet fuel and gasoil cargoes for loading in Sikka and Vadinar, sources said.

Bubble may burst

“There are so many LR2s in demand not only for transportation but also floating storage of commodities,” a source with another owner said.

Nevertheless he cautioned that this is a bubble that can burst if the contango disappears or prices of refined oil products fall further.

“There is not much physical demand and the storage build-up hinges on the holding power of the trading companies involved in the activity,” the sources said.

“Those companies that are buying physical cargoes and doing floating storage are taking short positions in the derviatives market,” said a broker in Singapore tracking such deals.

“The risk for these traders is that the product price may fall; to hedge they need to sell the paper.”

Some of this storage is being done because there are not many buyers for the cargo and demand has been hit due to empty streets, another broker said. It is still uncertain whether there will be buyers six months from now, he said.

Source: Platts

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