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The big news in oil refining in the last month was not the strikes in France, which shuttered three refineries for varying periods of time, nor the temporary shuttering of Permis, or of BP’s Rotterdam refinery for scheduled maintenance. The big news was the record crack spread (profit margin per barrel), stretching well over $80 per barrel by mid-October, an all-time record. This number comes from a shortage of gasoil production in Europe particularly and tight supplies globally. OECD crude oil and product stocks are at the bottom of their five year range at around 60 days’ supply, meaning that imports from non-OECD supplies to OECD nations are rising. Some traders are already talking about up to 3m barrels per day more products being booked for November shipment from east of Suez to OECD European members. A simple count of daily tanker arrivals daily at ARA shows how imports to Europe are growing, from around 210 arrivals in November 2021 to around 240 a day in the first half of October this year, according to Shipping Strategy’s Mark Williams, addressing the ARACON2022 convention in Rotterdam on October 20. Product tanker freight rates are expected to respond positively. TC8, the Baltic Exchange’s Jubail-Rotterdam LR1 assessment, rose to an average of $50,789 for September, compared to $38,819 for August. In the first half of October, it fell to $29,606 but the margin that Mid-East refiners can make on selling product into the EU suggests that it will be rising imminently. US refiners are maintaining steady supplies to Europe, benefiting the Atlantic MR average, which has been hovering around $40,000 a day since April, including $36,940 for the first three weeks of October. The 30,000-tonne fuel oil trip from Primorsk to Le Havre has been performing well while it can, but its days are numbered due to the EU ban on Russian exports. It averaged around $5,500 in 2021, rocketed up to a peak of $60,163 in July this year and then subsided to $33,560 in September. But a rising tide lifts all boats and it increased to $40,134 in the first three weeks of October. Data from Vortexa shows that nearly three quarters of Russia’s Primorsk exports still go to the EU but that they now only make up around 40% of the EU’s fuel oil imports. The conclusion is that Russia’s fuel oil exports are falling. It’s a long journey from Primorsk to alternative buyers in India and the Far East. US exports of oil products broke records in H122, climbing 11% year-on-year to 6m barrels per day, though the growth in distillates was 19% for the same period. The EIA said in September that it hasn’t seen a big increase in exports to Europe yet as the EU ban on Russian products does not enter force until February next year. But US refiners are enjoying a bounce in demand from Latin America. This is causing some consternation in the US government. Energy secretary Jennifer Granholm wrote to refiners in August asking them to focus on building inventory rather than exports. They haven’t listened. TC18, the USG-Brazil assessment from the Baltic Exchange expanded from an average of $10,333 in Q1 to $31,770 in Q2 and $36,454 in Q3, with a September peak of $39,756. The average for the first three weeks of October is a bit lower at $34,752, but still encouraging. Rates on TC1 to from the Middle East to the Far East on an LR2 vessel inflated 20% in September to average $55,682 before falling in October to an average of $31,193 for the first three weeks of October, including a rebound from a low of $25,217 on October 7. The Pacific MR basket also lost ground after pushing up towards $70,000 a day in September, it subsided to just $37,525 averaged for the first three weeks of October. The Pacific is not currently the driving force in the products tanker market. Crude oil tanker markets have apparently shrugged off OPEC+ decision to cut production by 2m barrels per day, perhaps because half of that was already priced in due to underproduction. Russia and Saudi Arabia will both cut production by over 500,000 barrels per day – about two VLCCs a week from Saudi Arabia. Most tanker brokers’ concerns are around oil demand as the OECD falls into recession - and maybe China too though its GDP numbers have been delayed due to the party congress and Xi Jinping’s coronation. According to Poten and Partners, modern VLCC earnings were up to $78,400 a day on October 18, compared to a year-to-date average of just $9,700. The Baltic’s VLCC average (of Middle East to US and Middle East to China) has improved from $27,343 on October 3 to a peak of $48,966 on October 18. Suezmax operators are equally happy with short tonnage availability in West Africa and steady flows through Suez into the Med pushing up the S2 average from $55,434 on October 3 to a peak of $71,679 on October 17. Aframax average earnings have also risen sharply from an average of $45,671 for September to a $65,622 on October 21 with no sign of them slowing. The BDTI is back to levels last seen in April this year.

Tankers: the crack is mighty

The profit margin per barrel is changing dynamics dramatically.

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