According to Ocean Freight Exchange (OFE), the pace of deliveries is expected to pick up in the second half of the year, bringing the net fleet growth for 2017 to 3-4%. Around 30% of expected LR2 newbuild deliveries and 25% of expected LR1 newbuild deliveries this year have taken place so far.
On the demand side, higher June and July naphtha inflows from the West on the back of a wide East/West spread have led to a build-up in buyers’ inventories. As such, this is likely to displace some flows into Asia, resulting in less movements along the benchmark AG-Japan route and further pressuring LR tanker rates in the third quarter of the year.
While North Asian naphtha import volumes are relatively steady, naphtha imports into China have been dropping steadily due to increased domestic output.
The strength in the Asian gasoil market has led to a persistently strong EFS which has kept the East-West arb closed this year, resulting in less LR tankers moving along the key AG/Europe routes. This is expected to continue to weigh on the Asian LR market in the third quarter.
However, the Asian medium range segment, which has recently rebounded from multi year lows, could experience some upside, OFE said.
Chinese product exports in the third quarter are likely to be supported by the recent release of the third batch of fuel export quotas, the conclusion of refinery maintenance season as well as lower domestic demand for gasoil due to a nationwide fishing ban.
The third batch of fuel export quotas stand at 15.4 mmt, which is 231% higher than the previous batch and 152% higher year on year.