Americans hit the road en masse for summertime travel each year starting Memorial Day weekend, pumping up gasoline sales through Labor Day in early September. Summer airplane travel takes off, consuming more jet fuel. Europeans load up their cars and head to the Mediterranean beaches and inland lakes in July and August, consuming more diesel.
Fuel markets are even more volatile this summer than usual. As American and European vacationers burn more refined petroleum products en route to their holiday destinations, one of the world’s largest suppliers of refined petroleum products — Russia — is mired in war.
On one hand, crude prices are falling due to recession fears and elevated Russian exports. Lower crude costs are keeping the prices of gasoline, diesel and jet fuel in check.
On the other hand, Western inventories are low and consumption is strong, rapidly rebounding toward pre-COVID levels. The supply-demand balance — and thus Atlantic Basin tanker rates — could change quickly.
No gasoline price spike predicted
Analysts initially feared price-cap sanctions on Russian exports would spur global shortages and thus higher prices at the pump. That hasn’t happened. Sanctions are generally working as designed, curbing Russian export profits while simultaneously keeping global markets supplied.
U.S. gasoline prices averaged $3.58 per gallon on Wednesday, down 23% year on year, according to AAA. The Energy Information Administration (EIA) does not predict a summer spike. Rather, it expects average prices to fall to $3.20 per gallon by September due to “rising refinery runs from global and U.S. refineries.”
Erik Broekhuizen, manager of marine research at Poten & Partners, said in a recent report that 2023 U.S. vehicle miles traveled (VMT) are on par with 2019 levels, yet the EIA expects June-August gasoline demand to average 9.1 million barrels per day (b/d), down from 9.7 million b/d in June-August 2018 and 2019.
Declining demand despite firm VMT is due to higher average fuel efficiency, said Broekhuizen, who noted that 18.5% of new car sales are for gasoline hybrid vehicles, plug-in hybrid electric vehicles or electric vehicles.
Ship brokerage BRS said Tuesday, “The increasing energy efficiency of the internal combustion engine and recent changes in mobility — notably the still-high prevalence of work from home — suggest U.S. gasoline demand is unlikely to surpass its pre-COVID peak.”
This summer’s driving-season debut was weaker than expected. GasBuddy reported Wednesday that total demand over Memorial Day weekend was down 1.5% versus the same period last year. The expectation had been for a 6% increase.
“From a clean [refined product] tanker perspective, this year’s driving season has started out with a whimper rather than a bang,” said BRS.
Trans-Atlantic backhaul outperforming fronthaul
Summertime demand is eventually expected to boost product tanker rates.
The trans-Atlantic fuel trade is served by medium-range (MR) product tankers, particularly MR2s (tankers with capacity of 40,000-54,999 deadweight tons). American diesel and gasoline are traditionally exported aboard MRs to South America and European gasoline is shipped aboard MRs to the U.S.
Brazil recently replaced much of its imports of U.S. diesel with cheap cargoes from Russia. “Over half of Brazil’s nearly 200,000 b/d of diesel imports [in April] were made up of discounted Russian supply, with the U.S. share reduced to 21%,” said price-reporting agency Argus.
American diesel is now flowing to Europe instead of Brazil. “Contrary to previous years, Atlantic Basin MR demand is being led by demand to ship U.S. diesel to Europe,” said BRS. “MR earnings on the backhaul [eastbound] voyage are standing at a rare premium to [the fronthaul Europe-U.S. trade].
“Europe is looking for alternative supplies as it has backed out the 700,000 b/d of diesel it previously imported from Russia.
“Indeed, the scale of this problem is now steadily being unmasked by recent draws in European diesel inventories that were built ahead of the EU embargo of Russian refined product imports.”
BRS said higher consumption during the European summer driving season should further boost demand for U.S. diesel. Meanwhile, the shift of Russian diesel toward Brazil “is yet another example of the reorientation of Russia’s oil flows adding ton-miles to clean tanker demand.”
Higher US imports on top of higher exports
The positive effect of the U.S. driving season on gasoline shipping demand should be layered on top of these other Atlantic Basin market trends.
Clarksons Securities put average spot rates for non-eco-design MRs at $34,400 per day on Wednesday, up 46% month on month but 15% below the 52-week trailing average.
Broekhuizen noted that U.S. imports of gasoline and blending components typically rise during the summer driving season. “We may see [U.S.] imports pick up over the summer while exports are expected to remain healthy as well,” he said.
“Under this scenario, the product tanker market should benefit from healthy trans-Atlantic flows as well as regular arbitrage opportunities.”
According to BRS, “Low inventories should help to support gasoline imports across this year. If imports do not maintain pace with demand, prices would likely be propelled higher, leading to an open trans-Atlantic gasoline arbitrage window.” The brokerage also noted that low U.S. inventories should make both gasoline prices and import levels more volatile, “which could potentially drive short-term spikes in MR2 hire rates.”
“All signs suggest that this summer should be bright for Western MR2 demand,” said BRS.
Click for more articles by Greg Miller
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