LR2s to Reap the Fruits from 0.5 Pct Sulphur Cap

Clean product tankers are likely to benefit from the implementation of the global 0.5% sulphur emissions cap as of 2020 driven by the demand for new fuel oil, McQuilling Services brokerage and consultancy writes in its industry note.

As disclosed, the forthcoming cap may materially alter trade flows of fuel oil and middle distillates in 2020 and beyond as a new bunker fuel blend containing fuel oil components and gasoil is expected to enter the market.

“Assuming this new fuel will be classified as a clean product, we anticipate a material rise in ton-mile demand for product tankers, with a bias towards larger tankers (LR2) for expected long-haul transportation requirements,” the consultancy firm said.

Considering the current global refining complex, East of the Suez markets are likely to be self-sufficient and meet regional demand while Western markets with less complex refining systems (Europe, Latin America and FSU/Russia) will likely switch and become net importers of the new bunker fuel.

The Middle East is projected to produce 2.81 million b/d of gasoil by 2020/21, which is 34% more than regional demand; thus McQuilling foresees this region as being a large export center for gasoil, boosting tanker demand.

“In fact, we are likely to see Middle East exports rise substantially to Europe, as well as potentially to more distant markets in the Americas,” the firm added.

However, there are still some uncertainties with regard to the implementation of the regulation and its impact on gasoil having in mind that some owners are still taking a “wait and see” approach and considering the use of scrubber technology on their ships.

“Increasing use of scrubbers will likely lead to higher demand for HSFO, as opposed to gasoil and relieve pricing pressure on HSFO, decreasing the spread between these two options. With a narrower spread there is less of an incentive to install the system, particularly for vessels with a shorter trading life on the horizon. As such, we expect the minority of these owners to actually follow through on scrubbers,” the industry note further adds.

Furthermore, McQuilling anticipates an accelerated level of deletions/scrapping in the beginning of 2018 bringing some ease to oversupply and supporting freight rates.

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