The effective closure of the Strait of Hormuz is beginning to reshape clean tanker positioning, with LR2s the most exposed due to their heavy reliance on West-of-Hormuz employment. In response, a growing number of LR2 and MR2 vessels are ballasting from the Pacific to the Atlantic Basin as employment opportunities in the Middle East and Asia weaken.

While this shift is currently supporting freight rates through longer ballast distances and positioning inefficiencies, a sustained closure could eventually lead to excess tonnage in the Atlantic and downward pressure on rates.

The Strait of Hormuz is effectively closed for the second consecutive week. While some market participants continue to adopt a wait-and-see approach, ballast vessel movements are beginning to reflect a response. Increasing numbers of tankers are ballasting away from the region in both crude and CPP markets. This piece focuses on developments in the clean tanker segment.

LR Tankers Most Exposed
A prolonged disruption in the Strait of Hormuz would affect all major clean tanker classes, but LR2 tankers are the most exposed. Nearly 50% of global LR2 tonne-mile demand originates west of Hormuz, compared with roughly 20% for LR1s and 10% for MR2s.
As a result, vessels are seeking alternative employment outside the Middle East Gulf (MEG). Currently, 9 LR2 tankers have repositioned away from the region, with most ballasting from the Pacific into the Atlantic Basin, pushing this vessel flow to dataset highs.

Although MR2s are less directly exposed, similar behavior is emerging. The number of MR2s ballasting from the Pacific to the Atlantic is the highest seen this quarter, while the reverse trip remains limited. This imbalance is likely to increase the concentration of clean tanker tonnage in the Atlantic Basin.

The repositioning of MR2s is largely linked to refinery responses in Asia. Several refineries in China, South Korea, and Taiwan have announced reduced runs amid the current uncertainty, weakening product export demand from the Pacific. China specifically, has temporarily suspended all refined product exports globally, apart from Hong Kong and Macau (Bloomberg).

The reduced potential availability of cargoes in both Asia and the Middle East has also weighed on freight markets in the region. While Pacific clean tanker rates have started to soften, Atlantic Basin freight rates remain firm, providing a further incentive for MR2s to reposition westbound.

Potential Tonnage Build-Up in the Atlantic threatens rates
At present, freight rates remain near or above historical highs, driven by fleet inefficiencies and longer ballast distances. However, this dynamic could shift if the closure of the Strait of Hormuz persists.

A sustained inflow of MR2 and LR2 tonnage into the Atlantic Basin could eventually increase competition for a limited number of cargoes, putting downward pressure on freight rates. Apart from any marginal demand support on the back of the US Jones Act waiver, one potential silver lining however could come from longer voyage distances.

This could especially be true for the gasoline trade. Compared with peak levels over the past 30 months, Northwest Europe could add roughly 300 kbd of supply to the export market. At the same time, PADD1 gasoline inventories are currently above their seasonal range (EIA) while West Africa is becoming increasingly self-sufficient, reducing regional import demand. This combination could redirect gasoline flows toward Asia, particularly if lower refinery runs there create supply needs.

If this occurs, it would generate long-haul employment opportunities for clean tankers, particularly LR2 vessels, helping offset some of the pressure from rising vessel availability in the Atlantic Basin.

Source: Kpler