European refinery woes pose a challenging market environment for product tanker owners

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Category: General

Published on Wednesday, 04 December 2013 07:57

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Wednesday, 04 December 2013 | 00:00 

The trials and tribulations of refineries across Europe have been littering the global news scene throughout the year. It's no secret that refinery utilization rates in Europe have been steadily trending lower as crack spreads have declined, challenging ship owners to turn a profit. According to a recent analysis from Poten & Partners, "European refineries have struggled to remain competitive as high Brent prices have impaired profitability resulting in fewer product exports. There are currently 748,000 bbls/d of refinery capacity that is either for sale or under strategic review (i.e. facing possible closure). Since 2009, approximately 7% of European refineries have closed, and Bloomberg notes that there is still a 15% overcapacity in the market, with additional closures likely".

Poten added that "in addition, European refiners are dependent on a core export market for gasoline. This market has suffered as US domestic refinery throughputs increased following the explosion of tight inland grades of crude. US refiners are running at high utilization rates and offsetting the need for European gasoline imports. The UK Continent – US Atlantic Coast trade (TC2), was once the fronthaul voyage for clean product tankers has now been trading flat at WS70 for most of this quarter. However, freight rates for the transatlantic voyage rose sharply at the start of this week to WS100. Time charter earnings at these levels amount to $3,500; still a far cry from the $11,700/d that a Medium Range (MR) tanker can command for US Gulf exports. The recent increase from WS70 to WS100 appears to be driven by a shortage of tonnage in the European load region as ballasters have been repositioning away from the Continent to the US Gulf".

Meanwhile, "in spite of the robust US Gasoline inventory levels throughout most of the year, last week’s inventory levels hit an annual low which has driven some of the recent cargo volumes. However, this rally is expected to be short lived as inventory builds are forecasted to increase following refinery restarts on the US Atlantic Coast. In addition, owners may reconsider the decision to ballast away from the region going forward. As can be seen in the following chart, European refinery utilization rates have risen following the end of the turnaround window, increasing volumes available for export" Pote mentioned.

 Cheap natural gas and access to inland crude grades will ensure US refiners’ ability to operate at high levels for the foreseeable future. According to a report released by Valero, it costs a refinery $1.11/bbl for natural gas feedstocks in the US compared to $2.77/bbl in Europe, a substantial premium for producers. "As the US supplies more of its own clean product requirements, European producers will be challenged to efficiently compete. The growing refinery capacity in the Arabian Gulf and Far East will further reduce export markets available for the European refiners, which does not provide an optimistic outlook for an already suffering market", Poten concluded.

Meanwhile, in its product tanker market outlook, leading ship owner Frontline, noted that "the market rate for an MR trading on Standard "TC2" voyage between Rotterdam and New York in the second quarter of 2013 was WS 94, representing a decrease of WS 34 from the second quarter of 2013 and a decrease of WS 21 from the third quarter of 2012. The flat rate increased by 9 percent from 2012 to 2013.

Bunkers in Rotterdam averaged $585/mt in the third quarter of 2013 compared to $618/mt in the second quarter of 2013. Bunker prices varied between a high of $615/mt on April 2nd and a low of $578/mt on June 28th.

The MR fleet totaled 1,488 vessels at the end of the third quarter of 2013, down from 1,491 vessels at the end of the previous quarter. The order book counted 303 vessels at the end of the third quarter, which represents approximately 20 percent of the MR fleet.

The LR2 fleet totaled 212 vessels at the end of the third quarter of 2013, unchanged from the previous quarter. The order book counted 30 vessels at the end of the third quarter, which represents approximately 14 percent of the LR2 fleet", Frontline concluded.

Nikos Roussanoglou, Hellenic Shipping News Worldwide

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