The ongoing Red Sea crisis has led to an increase in detours around Africa’s Cape of Good Hope, resulting in higher spot rates across various shipping sectors. Initially impacting container ships, the freight fallout is now significantly affecting product tankers, which transport petroleum products.
Larger product tankers performing long-haul runs are increasingly diverting around Africa. This includes LR1s and LR2s, which have capacities ranging from 55,000 to 119,000 deadweight tons (DWT). The extended transit times for these long-haul product tankers are causing a surge in demand for regional replacement shipments, using short-haul vessels known as MRs.
The Red Sea crisis has also affected fuel prices, with diesel prices in Europe already increasing due to halted diesel flow through the Red Sea and Suez Canal. Shipping analysts predict further price increases as vessels reroute around Africa.
Tanker rates are experiencing upward pressure, with analysts noting disruptions to trade routes and potential increases in spot rates. Product tanker rates are nearing cyclical highs, with spot rates for LR2s and LR1s significantly higher compared to a year ago. Modern-built LR2s are averaging $84,800 per day, while LR1s are averaging $61,600 per day. Rates for modern-built MRs are also up, averaging $45,600 per day.
Despite the increase in freight rates, stocks of U.S.-listed product tanker owners have not seen a similar rise. Equities of companies like Ardmore Shipping, Scorpio Tankers, and Torm have seen some gains but lag behind the rate improvements. Analysts believe that product tanker equities offer strong risk/reward potential, as the ongoing market strength has not been fully priced in.
