New Deliveries to Keep LR Freight Rates Down

Freight rates for the Long Range (LR) tankers are expected to remain low for the rest of this and the next year, according to a tanker market update from McQuilling Services.

“Based on the developments witnessed over the first seven months of this year, we have adjusted our expectations for 2017/2018 down slightly in our Mid-Year Update; however, for the long-term, we project rates to follow the same slope of a slight recovery,” the market outlook reads.

Hence, on a Time Charter Equivalent (TCE) basis, LR2 owners are expected to earn an average of USD 11,000/day in 2017 and USD 11,700/day in 2018. For LR1 owners, anticipated earnings are USD 8,500/day in 2017 and USD 9,300/day in 2018.

Despite the likely demand growth within the LR1 sector, McQuilling said that freight rates will face downward pressure from a stable vessel delivery schedule over the next few years, while the LR2s will remain pressured from both sides of the equation this year.

“According to our forecast models, 18 LR2 vessels are left to hit the water before the end of 2017, while nine more LR1s are projected to enter the fleet. With a full-year deletion schedule of six vessels (5 LR2s and 1 LR1) for 2017, we expect considerable freight rate pressure to stem from vessel supply,” the industry note adds.

“Year-to-date, we have observed relatively healthy contracting in the LR2 sector with 12 firm orders reported,
which remains above levels witnessed since 2014.”

There have been no orders placed within the LR1 sector during the first seven months of 2017.

In addition, scrapping is projected to remain relatively subdued over the forecast period due to the young age of the overall LR fleet.

Taking these factors into account, McQuilling expects the LR2 fleet to expand by an average 6.9% over the forecast period, while the LR1 sector is on track to experience a more modest 4.3% growth on average over the next five years.

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