The EU’s ban on Russian oil products and increased Ukrainian drone strikes are driving inefficiencies in product tanker markets and bolstering the outlook for freight rates, Torm reported Nov. 6.

This comes as geopolitical disruptions and structural changes in global refining patterns improved ton-mile demand in the third quarter, driven by East-to-West flows and Atlantic basin middle distillate movements, the company said in its Q3 interim earnings report.

Sanctions continue to color markets. These include an EU import ban on oil products derived from Russian crude, and US sanctions on Rosneft and Lukoil that took effect in October.

“Geopolitical volatility and broader vessel sanctions continued to add complexity and underpin the tanker market this quarter,” Torm said in a statement accompanying its Q3 interim financial report.

Alongside this, intensified drone strikes on Russian refineries elevate market inefficiencies, Torm said. According to S&P Global Commodities at Sea data, Russian refined product exports averaged 1 million b/d in the week to Nov. 2, down 300,000 b/d week over week and 100,000 b/d from October levels.

Torm’s Time Charter Equivalent in Q3 averaged $31,012/d, down 8% year over year. Platts, part of S&P Global Commodity Insights, assessed the rate to carry a 90,000 metric ton cargo from the Persian Gulf to UK-Continent at an average of $40.43/mt in Q3, down 30% year over year and below a five-year average of $46.58/mt.

In the near term, clean tanker rates are expected to garner support from tightness in Long Range 1 and 2 tankers in the East and steady long-haul sentiment from the Mediterranean to Japan, analysts with Commodity Insights said Nov. 6.

“Sanctions and enforcement continue to sustain longer LR ton-miles and compliance risk, though the rate impact is moderate,” they said. Refinery margins and utilization remain constructive for freight rates, limiting downside potential as early-November momentum cools, they added.

Market dynamics

Trade volumes increased 4% quarter over quarter and 2% year over year in the third quarter, with the company noting that trade flows continue to benefit from refinery closures in Northwest Europe and the US West Coast over the medium term.

Despite nominal fleet growth of 5% in the product tanker segment, effective trading capacity for clean products decreased by 1% as vessels shifted into dirty trades and the fleet aged, Torm said. Approximately 10 fewer LR2 vessels are trading CPP compared to a year ago, despite 48 newbuildings adding to the fleet, the company said.

The company maintained its fleet size at 88 vessels during the quarter through strategic transactions.

The tanker market faces a complex supply-demand picture, with the LR2/Aframax segment heavily impacted by sanctions, with 27% of capacity under OFAC/EU/UK sanctions, and half of the fleet over 20 years old. However, high LR2 order books are balanced by low Aframax order books and an aging fleet, supporting market fundamentals, Torm said.

Source: Platts