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Oil prices have fallen throughout July but retail fuel prices have not, giving refiners a much-needed boost to their profit margins. By July 22, WTI was below $95 a barrel while Brent closed at $98.75 – still $20 higher than it was before the Russians invaded Ukraine. US refining margins have increased from lows of $2.5 per barrel in Q220 to around $17.5 per barrel in Q322. US refinery utilisation is running at over 90% to meet strong summer demand at record crack spreads due to lower crude oil prices. Refiners are building inventory, by 4.1m barrels in the week to July 22, with more barrels coming from the Middle East and Central America. The US is switching out of Russian fuel oil to importing more from the Middle East, as imports of fuel oil and residual fuel have fallen by a third quarter on quarter. According to research from S&P Global Commodities at Sea, the US imported an average of 330,000 barrels per day of fuel oil and residues – primarily VGO – during Q2, a 162,000 barrels per day reduction from nearly 500,000 barrels per day in Q1. To further offset the loss of Russian fuel oil and VGO, US refiners are importing heavy crude grades to refine their own fuels. The products trades appear to be taking a breather while refiners ramp up capacity utilisation Earnings for aframaxes on the Caribs-USG route have increased by 125% in a month to $21,201 on July 22. Panamaxes, more suited to the business, were rated at $45,112 on July 22, a fourfold increase in a month. Rates to hire a panamax from the east coast of Mexico to the USG have leapt sevenfold to $68,807 on July 22. Disruption to the Keystone oil pipeline from Canada to the US cut throughput by 15% from mid-July, which could lead to further gains on this short-haul. Meanwhile as China tries to get its economy moving again, fixtures on TD3C from the Middle East to China have increased with a Frontline tanker said to have achieved over $61,000 a day for that voyage on or around July 20, a considerable improvement on the $-20,994 a day the Baltic Exchange was reporting a month earlier and even on the $4,716 a day the Baltic Exchange was reporting on TD3 on July 20. China imported 8.75m barrels per day in June, the lowest level for four years – hence the low VLCC rates back then – but if the tanker market is a reliable indicator, then China’s imports will grow to 10m barrels per day or more in July as refiners take advantage of lower prices to build inventory. China’s leading crude oil supplier is currently Russia, much via pipeline, which may cap seaborne crude oil imports from farther away. Nonetheless, earnings for aframaxes on the route from the Russian Far East to China went up 25% in the month to 22 July, from $72,421 to a heady $90,849. VLCC rates on TD15, WAF-China, are also up, rising from a low of $-22,281 on June 7 to an opex-covering $10,829 on July 22. Similarly, VLCCs trading from the Middle East to Singapore were being fixed at $-22,372 at the low point on June 10, but recovered to $10,322 on July 22. VLCCs fitted with scrubbers can burn cheaper fuel oil and make bigger returns than ships burning more expensive VLSFO. The EU has renewed access to Libyan crude after the African nation dropped its longstanding force majeure. Cross-Med aframax rates doubled in the month to July 22 to $79,641. There are fears about demand levels in Europe as macro signals weaken and after the ECB raised interest rates by 0.5%, its first increase for 11 years. Indeed, recession fears are behind the falling oil price, so tanker owners have to wonder how long this rally can last if global oil demand slows in the latter part of this year. While the BDTI is up 22% over the last 30 days, the BCTI is down 24%. In the oil products tanker market, the worst performer has been TC6, the cross-Med route, which lost 47% to settle at $23,211 on July 22, as exporters have switched to shipping crude to European refineries. The best performer has been TC9, the Baltic’s code for a 30,000 tonne cargo shipped from Primorsk to Le Havre, which was up 4% over 30 days to finish July 23 on $60,703. The headline TC1 route (Middle East to Japan) fell 25% over the month to $39,376, still a healthy number, while the previously hot voyage from South Korea to the US west coast gave up 10% to end July 22 at $50,815. In the Atlantic, the Baltic’s MR basket lost 19% on the month to fall at $ 37,866 while the Pacific MR basket was down 13% at $55,454. After a good first half, the products trades appear to be taking a breather while refiners ramp up capacity utilisation. Have they reached their seasonal peak for the year? The BCTI suggests they have.

Tankers benefit from refining margins

Oil prices might be falling, but freight rates for most tankers are heading in the other direction.

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