Watch Now


‘Gobbling up’ cargo: How crude tankers cannibalized product tankers

Product-tanker owners see profits ahead despite crude-tanker competition

(Photo: Shutterstock/Anatoly Menzhiliy)

Good news for refined product tankers: Those “cannibals” over in the crude business have temporarily stopped feasting on their cargoes.

Some tankers are specifically designed with coated tanks to switch between crude oil and refined products like gasoline and diesel. But even uncoated crude tankers can carry products if they’re brand new on their maiden voyage out of an Asian shipyard.

That is exactly what they’ve done in 2021, more so than ever before.

Newly delivered crude tankers in the VLCC (2-million-barrel capacity) and Suezmax (1-million-barrel capacity) classes have frequently filled up with refined products in Asia, stealing loads from larger product tankers known as LR2s (tankers with capacity of 80,000-119,999 deadweight tons or DWT).


Now, there is a lull in crude-tanker newbuild deliveries, and consequently, a lull in cargo cannibalization. LR2 rates have just jumped. Clarksons Platou Securities put spot rates for modern LR2s (built 2015 or later) at $22,900 per day on Thursday, up 15% from Wednesday and up 62% month on month.

Shares of product-tanker owner Scorpio Tankers (NYSE: STNG), which operates 42 LR2s, spiked 12% on Thursday after the company’s bullish conference call. As Stifel analyst Ben Nolan put it, “No one has ever accused Scorpio of being conservative, and that can certainly be said with respect to this quarter’s conference call. Despite one of the most challenging tanker markets in history, the company basically called their shot that [Q3 2021] marked the trough, with the back half of Q4 being sharply better and things only getting better from there.”

Scorpio execs, as well as those of other product tanker owners reporting results this week, did bring up the lull-in-cannibalization issue, although they stressed a much wider range of positive drivers for LR2s as well as smaller size categories.

But after so many disappointments and head fakes for product-tanker rates — not to mention huge losses in 3Q 2021 — a key question for 2022 is: Will broader fundamental improvements prevail if cargo cannibalization returns?


Cannibalization redux in 2022?

According to a new report by Alphatanker, “One major factor capping clean tanker hire rates so far this year has been the gobbling up of long-haul east-to-west gasoil and diesel cargoes by newbuild VLCCs and Suezmaxes undertaking maiden voyages. Although this trend is not new, it has accelerated this year against a backdrop of a lousy crude-tanker market, with returns often standing well below breakeven levels.

“This is one of the main reasons why it has been so hard for CPP [clean petroleum product] tankers to garner sustained upward momentum despite soaring global oil and CPP tanker demand amid the steady unmasking of regional supply imbalances in refined product supply and demand.”

Alphatanker said that of the 33 VLCCs and 22 Suezmaxes delivered this year, 15 of the VLCC newbuilds and 16 of the Suezmaxes loaded diesel or gasoil on maiden voyages. Furthermore, these tankers “delayed entering the crude market for as long as possible.”

In some cases, they subsequently went into storage employment for refined products. “In rare instances, they have undertaken multiple clean voyages,” added Alphatanker, citing the case of one VLCC that loaded a clean cargo east of Suez in Q2, unloaded in the Atlantic Basin, loaded gasoil in Europe in Q3, then stored it off West Africa.

Altogether, Alphatanker estimates that a record 69 LR2 tanker cargoes were cannibalized by newbuild crude tankers this year.

Crude newbuild deliveries are likely over for 2021. “You don’t have the cannibalization by the VLCCs and Suezmaxes because they’re not going to be delivered in November and December,” said Lars Nielsen, commercial director of Scorpio Tankers, on Thursday’s conference call.

Alphaliner said that there are an additional four VLCCs and two Suezmaxes scheduled for delivery by year-end but it predicted that these would be pushed back to 2022 for two reasons: crude-tanker rates are very weak and delaying delivery a few months will give owners “the benefit from a 2022 delivery date and certification.”

However, that will create an “avalanche” of crude-tanker deliveries in Q1 2022, and all of these newbuilds “will make good candidates for loading east-of-Suez refined gasoil and diesel cargoes on their maiden voyages, which should pressure LR rates lower,” opined Alphatanker. Over full-year 2022, it sees 52 VLCCs and 50 Suezmax newbuild deliveries.


“Considering that crude-tanker demand is forecast to remain below its pre-pandemic level by the end of 2022, this suggests that crude-tanker hire rates will remain under pressure for at least the first half of the year [and] there should be no shortage of crude tankers looking to cannibalize CPP cargoes.”

Jacob Melgaard, CEO of product-tanker owner Torm (NASDAQ: TRMD), echoed that sentiment during his company’s conference call on Wednesday.

“This has been an issue throughout the year,” said Melgaard. “Currently, there’s a bit of an easing because the number of newbuilds has gone down [but] that will pick up again in the first half of next year. If the crude-tanker market is not picking up from where we are, we will see continued cannibalization by maiden voyages in the first half of next year.”

Broader fundamentals all positive

Scorpio’s Nielsen put a positive spin on the situation. He said that by the time crude tankers with delayed deliveries hit the water in Q1 2021, “at that point, I would imagine you’re going to start to see the OPEC crude increase starting to filter in as those markets come back to life.”

Nielsen also emphasized that the product-tanker sector is seeing green shoots well beyond the long-haul east-west LR2 trade. Demand is rising in South America and Mexico for U.S. exports, which fuels demand in the MR (25,000-54,999 DWT) and LR1 (55,000-79,999 DWT) classes. “We have seen a material rise in the U.S. Gulf MR market index,” said Nielsen.

The MR market is segregated from product-tanker trades cannibalized by crude tankers. According to Clarksons, modern MR spot rates are currently at $13,500 per day, up 69% month on month.

Anthony Gurnee, CEO of product and chemical tanker owner Ardmore Shipping (NYSE: ASC), said on a conference call Wednesday that his company’s MRs were averaging $15,300 per day over the past two weeks and one of its MRs was just fixed out of the U.S. Gulf at $20,500 per day.

Nielsen also pointed to other positives: Global refinery runs are above 80 million barrels per day for the first time since pre-COVID, U.S. East Coast gasoline inventories are the lowest in almost seven years, LR2 volumes are not just increasing from east to west but also from west to east, and mobility is increasing worldwide due to vaccinations.

According to Torm’s Melgaard, “The obstacles to the transportation fuel demand recovery are largely being removed.”

Evercore ISI analyst Jon Chappell said of product-tanker fundamentals, “This notoriously volatile industry requires a sustainable proof of recovery before calling the end of the prolonged downturn, but with markets moving higher and all of the macro factors now trending favorably, we have even greater conviction that the bottom is in.”

Product-tanker earnings roundup:

Click for more articles by Greg Miller 

Greg Miller

Greg Miller covers maritime for FreightWaves and American Shipper. After graduating Cornell University, he fled upstate New York's harsh winters for the island of St. Thomas, where he rose to editor-in-chief of the Virgin Islands Business Journal. In the aftermath of Hurricane Marilyn, he moved to New York City, where he served as senior editor of Cruise Industry News. He then spent 15 years at the shipping magazine Fairplay in various senior roles, including managing editor. He currently resides in Manhattan with his wife and two Shih Tzus.