Tankers: Asia LR2 rates at rare premium to LR1s on supply squeeze

In a rare reversal in differentials, Long Range II, or LR2, Worldscale rates on the benchmark Persian Gulf-Japan route are at a premium to LR1s due to a contrast in supply dynamics, market participants said Friday.

More than a dozen LR1s are available for loading during the next week in the Persian Gulf, while there are barely four or five LR2s for the next two weeks, said a Tokyo-based chartering executive with a global commodities trading company.

As a result, LR1 freight rates are likely to be under downward pressure next week, the executive said.

Rates for LR1s and LR2s on the Persian Gulf-Japan route were assessed Thursday at w131.5 and w140 respectively, a premium of w8.5 points for the LR2 and the highest so far for the year, according to the data of S&P Global Platts.

It is quite rare for LR2s to be chartered at a Worldscale points premium to LR1s. The last time this happened was for a couple of days in late-July, a day in mid-February and several days in December last year and the beginning of 2017, Platts data showed.

This is because of the economies of scale that the LR2s enjoy over the LR1s, giving charterers an opportunity to move larger cargoes at lower cost. The LR2s, LR1s and MRs typically carry cargoes of up to 90,000 mt, 65,000 mt and 40,000 mt each.

The reveral in differential may continue for several days until there is a spillover impact of weaker LR1s, market participants said.

“The LR2 rates are expected to fall only gradually,” a source with a clean oil tankers’ owner in Singapore said in light of the tight supply.

This flip is not going to continue forever, but as of now it seems the LR2s are stronger, said a Singapore-based chartering executive with an LR owner.

Daily LR1 earnings for owners on the Persian Gulf-Japan route have again declined below the key psychological mark of $10,000/day, while the corresponding number for the LR2 is around $14,000-$15,000/day, according to shipping industry executives’ estimates.

Last month, when devastating storms in the US pushed up demand for all vessel sizes, many LR2s were even chartered to load partial cargoes for intra-East Asia voyages. This delayed their ballast to the Persian Gulf and Red Sea region to pick up cargoes.

At the time, LR2s were relatively cheaper and were the vessel-size of choice to load parcels of clean products, said a broker in Singapore. But this tightened the supply and pushed up rates. Now, weaker LR1s may pull down the rates of LR2s, the broker said.

A counter-cyclical trend is now bound to happen. “The LR2 rates are still steady and some charterers may downsize their cargoes for loading on MRs and LR1s,” said a chartering source with a global commodities trading company.

The cost of moving 75,000 mt and 55,000 mt cargoes on the PG-Japan route is $21.29/mt and $20/mt respectively, according to S&P Global Platts data. The cost is $25.10/mt for Medium Range tankers.