Red Sea reopening could be less dire than feared for product tankers
Tonne-mile upside from Cape of Good Hope reroutings has already dissipated, limiting product tanker downside from a Red Sea reopening
Product tankers have not returned to the Red Sea route yet, but the chance of them doing so has increased. This has been negative for market sentiment, but there are reasons to think that rate headwinds for product tankers could be limited
THE POSSIBILITY that the Suez Canal route will reopen in 2025 has been negative for shipping sentiment, with expectations that bulk commodity vessels will return sooner than containerships on scheduled services.
“Product tanker equities faced significant pressure last week, partly due to concerns about the potential reopening of the Red Sea,” said Clarksons Securities analyst Frode Mørkedal in a client note on Monday.
The Houthis announced on January 19 that they would cease attacking non-Israeli vessels. However, this has yet to materially increase traffic through the Red Sea. There have been a few more ships testing the waters in the past week, but they were predominantly dry bulk carriers.
According to data from Lloyd’s List Intelligence, product tanker transits in the latest week were roughly the same as they have been for the past four months, at about half pre-Red Sea crisis levels.
Mitigating factors for product tankers
Even if product tankers do return en masse, Mørkedal believes the impact on rates should not be significant. Brokerage BRS published a similarly optimistic view in a market report last week.
“Although average tonne-miles rose nearly 6% last year, largely driven by [canal issues] in the first half, the market deteriorated as the year progressed, making longer detours around Africa less viable,” said Mørkedal.
The second half also saw significant cannibalisation of long-haul product tanker cargoes by very large crude carriers and suezmaxes that “cleaned up” and transported Asian products to Europe around the Cape of Good Hope.
“While [product tanker] tonne-miles increased by around 10% in the first half of the year, they only increased by 1% year on year in the second half,” said Mørkedal.
According to BRS, the effect of higher tanker transits via the Suez is “deemed a negative by market players [but] should be seen in the context of the incremental multiplier it has created. This multiplier almost dissipated in the second half of the year for tankers, with large product tankers impacted the most.”
BRS said that 2H24 tonne-mile headwinds for product tankers were due to the replacement of long-haul trades by exports to Europe from the US Gulf. This put “heavy pressure on LR2 rates”.
“A return to normalisation of oil trade flows via the Suez Canal — which we do not think will happen imminently and abruptly, but rather gradually if it materialises — may drive a much-needed increase in volumes that will partly counterbalance the decline in distances and mitigate the projected tonne-mile drop for product tankers,” said BRS.
According to Mørkedal, “We believe that reopening the Red Sea and Suez Canal could have little negative impact on the product tanker market” because it will allow “LR2s [long range 2 tankers] to transport more gasoil and jet fuel from the Asia-Pacific to Europe”.
Less cannibalisation by crude tankers?
There is also the prospect of reduced crude tanker cannibalisation of product tanker cargoes in 2025 versus 2024 as a result of new US sanctions on the Russian shadow tanker fleet. If so, this should mitigate tonne-mile negatives from a Red Sea reopening for product tankers.
The more that sanctions prevent shadow fleet aframaxes and suezmaxes from transporting Russian crude to China and India, the more that non-sanctioned VLCCs should benefit from new demand.
VLCC spot rates have pulled back since the initial spike caused by US sanctions, but VLCCs continue to hold on to a decent portion of their gains. The Baltic Exchange VLCC time-charter equivalent index was at $34,493 per day on Monday, down 40% from the peak on January 17 but still up 47% from January 7.
“It is also worth noting that 40-50% of the LR2 fleet typically trades in crude oil and dirty products,” said Mørkedal. “If crude tanker markets recover, LR2s could shift to the aframax crude segments, tightening supply in the product tanker market by reducing available vessels.”
The Baltic Exchange TCE index for LR2 product tankers from the Middle East Gulf to Japan was at $25,589 per day on Monday, whereas the index for aframax crude tankers sailing from Kuwait to Singapore was 26% higher, at $32,203 per day.
These two indexes are going in opposite directions, with the aframax index up 25% since January 15 and the LR2 index down 36%.
Indeed, the steep fall in product tanker stocks over the past week may not necessarily be due to weaker sentiment on Red Sea reopening fears. It might be that product tankers stocks are following spot rates downward.