This Week in Petroleum

Tanker rates for crude oil, petroleum products, and liquefied petroleum gas (LPG) reached record highs in November 2022. These increases were driven largely by some of the effects of Russia's full-scale invasion of Ukraine as well as delays at the Panama Canal. Tanker rates could increase through the winter because on December 5, 2022, the EU ban on importing seaborne crude oil from Russia took effect, and the G7 instituted a crude oil purchase-price cap of $60 per barrel for countries purchasing Russia's crude oil using European banks, insurance, or shipping services.

We classify petroleum tankers into two groups: clean tankers and dirty tankers. Clean tankers carry lower-sulfur petroleum products, including refined petroleum products such as motor gasoline, diesel fuel, jet fuel, and naphtha. Dirty tankers mostly carry crude oil, but they can also haul high-sulfur petroleum products such as residual fuel oil. LPG tankers are a type of natural gas carrier that transports LPG, typically propane, and the largest of those carriers are called Very Large Gas Carriers (VLGCs).

Historically, tanker rates increase during periods of low petroleum demand, when onshore storage fills and demand for tankers as a source of flexible, floating storage increases. In April 2020, an oversupply of crude oil and refined products, resulting from decreased demand related to COVID-19 responses, drove clean tanker and dirty tanker rates to record highs. Tanker rates decreased after petroleum demand and production cuts increased and remained relatively low from September 2020 to September 2021. In February 2022, rates for both clean and dirty tankers rose because of geopolitical instability related to Russia's full-scale invasion of Ukraine and rising bunker fuel prices. Dirty tanker rates have continued to increase since February 2022 (Figure 1).

Dirty tanker rates for Very Large Crude Carriers (VLCCs) have increased the most. VLCC rates from the Middle East Gulf to the U.S. Gulf Coast (USGC) and Asia Pacific more than tripled from February 2022 to November 2022. At the same time, the VLCC rate from the USGC to Rotterdam tripled, increasing from more than $8.00 per metric ton (mt) to nearly $27.00/mt. Rates for Suezmax vessels (one size class smaller than VLCCs) from the USGC to Europe nearly tripled to almost $34.00/mt in November 2022, about $6.00/mt more than a similar route for the larger VLCCs. Dirty tanker rates for voyages originating in Russian sea ports on the Baltic Sea (Primorsk) and Black Sea (Novorossiysk) increased significantly from January to April 2022 following an insurance risk premium related to Russia's full-scale invasion of Ukraine as well as higher bunker fuel costs. However, from April 2022 to November 2022, rates from Primorsk decreased by about 46% and from Novorossiysk by about 4%. In spite of these decreases, rates are still currently more than double what they were in February 2022.

Since February 2022, clean tanker rates for ships operating in ports closely associated with Russia and Europe have also increased because of geopolitical uncertainty and insurance risk premiums. Clean petroleum products are typically transported on medium range (MR) tankers, which are generally smaller than dirty tankers. MR clean tanker rates have risen to record highs since April 2020 and have remained elevated as of November 2022 (Figure 2). As the tanker rates increase, European countries are purchasing distillate from countries further away from Russia, and the longer voyage time is adding to the cost of chartering a vessel, increasing the cost per metric ton.

Tanker rates for MR vessels on the Baltic-UK Continent (UKC) route doubled from February to May 2022, reaching more than $36.00/mt. At the end of April, Rosneft (Russia's second-largest, state-controlled company) announced that it would eliminate diesel exports from the Baltic port of Primorsk in May. Clean tanker rates on the Baltic-UKC route responded by rising a further 22% from May to July, reaching $44.00/mt. To make up for fewer diesel imports from Russia, Europe has been increasing imports from other sources, particularly the United States, according to trade press and ship tracking services. Weekly U.S. distillate fuel exports to all destinations were near or above the top of the five-year (2017─2021) range from May to September, but they have since dropped to average volumes. From May to November 2022, rates from the USGC/Caribbean to the UKC and the U.S. Atlantic Coast (USAC) to the UKC fell 6% and 7%, respectively. Meanwhile rates from the UKC to the USAC have increased by 2% in that same timeframe.

VLGC rates are highly seasonal; they increase in the winter when demand for propane as a heating fuel is highest and decrease in the summer when heating demand subsides. Petrochemical demand also affects VLGC rates because propane is used as a petrochemical feedstock. VLGC rates rose sharply in December 2020, as a result of the largest U.S. propane exports on record, 1.6 million barrels per day (b/d) (Figure 3). Similarly, VLGC rates in the 2021-22 winter were relatively high; U.S. winter propane exports averaged about 1.3 million b/d from October 2021 to February 2022, the second-most during that timeframe behind winter 2020-21. In May 2022, VLGC rates rose due to delays on the Panama Canal, tightening the VLGC fleet and keeping vessels out of the market. In October 2022, rates on all three VLGC benchmark routes exceeded the previous December 2020 peak due to further delays associated with the Panama Canal as well as a higher petrochemical demand for propane. In China, operating rates at propane dehydrogenation units, which consume propane as a feedstock to produce propylene, increased from about 60% in September to around 80% in October. U.S. propane exports have been consistently above the five-year range since the end of May 2022, based on weekly data. A tighter supply from Russia since its full-scale invasion of Ukraine is causing buyers in Europe to look to the United States for supply, and U.S. propane exports to Europe have been increasing this year.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.

Tags: crude oil, marine transportation, oil/petroleum, petroleum products, prices, propane

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