The critics were quick to pounce when the EU banned imports of Russian crude and products and the EU and G-7 implemented price caps. It won’t work, they said. There won’t be enough ships to keep Russian trade flowing. Russian diesel and crude production will get shut in. It will lead to a global shortage, causing prices for consumers and businesses to spike. The sanction plan will backfire on Western governments.
None of this happened. The Western plan is working as designed. Russia is being forced to accept steep discounts on its crude and diesel, and its exports continue to flow.
According to Kpler, Russia exported 2 million barrels per day (b/d) of clean products in March. That was the highest volume since Kpler began keeping records in 2016. Russia’s crude exports in March averaged 3.54 million b/d, at the high end of the historical range.
Russia’s oil-discount loss is being transformed into tanker shipping’s freight-rate gain. Russian crude and diesel loads are having to travel much longer distances. Owners of tankers carrying Russian cargoes are obtaining very large freight premiums.
This geopolitically driven tanker bounty is spreading. In the early days of sanctions, most of Russia’s exports were loaded on the so-called “shadow fleet,” tankers with opaque ownership and non-Western insurance that did not transact in U.S. dollars.
That has changed. Western tankers are now increasingly involved in the Russian trade. They are carrying cargoes under the price cap and using U.K. and EU insurance and shipping services, just as the sanctions regime intended.
Russian trade going mainstream
“For now, EU members are still playing a big role in ferrying Russian oil,” Reid I’Anson, senior commodity analyst at Kpler, told FreightWaves.
Kpler data showed that 36% of Russian crude was carried by EU-linked tankers in February. Russian tankers handled 28%, with 26% carried by the “gray fleet,” 7% by the “dark fleet” and 6% by others. (Terms like “gray fleet” and “dark fleet” are increasingly used to refer to the shadow fleet, given the different shades and nuances of tankers’ sanctions exposure.)
According to brokerage BRS, “In the early days of the crude price cap in December [it was implemented Dec. 5], data suggested that around nine in 10 crude liftings were undertaken by tankers classed as being part of the gray fleet.
“However, the number of mainstream tankers calling at Russian ports has increased steadily since then. Data now implies that only 30% of Russian crude fixtures are by gray tankers,” said BRS.
The EU import ban on Russian products and the EU and G-7 products price cap went into effect on Feb. 5. “Gray tankers appear to only be accounting for one in five liftings of Russian refined products” since then, said BRS.
John Ollett, freight deputy editor at price-reporting agency Argus, said during a presentation on April 5, “There have been 131 tankers carrying Russian products out of the Black Sea since Feb. 5. Of those, 57 have been Greek, 26 have been Turkish and 10 have been from the UAE. Those are the top three owners.
“These are not sanctionable trades because the product is under the price cap. We don’t see the dark fleet as having a particular hand in product exports at the moment,” said Ollett.
According to BRS, “That mainstream tankers are seemingly comfortable to call at Russian ports is attributable to the efforts of governments to reassure companies … they are not acting illegally, provided they act under the constraints of the price cap. The U.S. has reportedly met with several international oil traders over recent weeks to reassure them … and this message appears to have been passed down to tanker owners.”
Shipowners are making a lot of profit’
Tanker owners that legally transport Russian products under the price cap are earning “significantly over the standard freight rate,” said Ollett.
“At the moment, a Black Sea-to-Mediterranean trade is about 450 Worldscale points [Worldscale is a tanker freight measurement system]. For Russian-origin trade, it’s 800-1,000. There’s a similar difference in the Baltic, which is around Worldscale 350, and for Russian trade, about Worldscale 1,000.
“Shipowners are making a lot of profit on these voyages,” said Ollett. However, not everyone is getting a piece of the action. He pointed out that the owners doing such deals are private players, not publicly traded owners.
It’s mainly Greek private owners reaping the rewards. U.S.-listed tanker owners — which face reputational issues with their investors, banks and larger charterers — are on the sidelines.
“Some of our customers have imposed their own sanctions, saying, ‘If you call in Russia we won’t do business with you,’” said James Doyle, head of corporate development at Scorpio Tankers (NYSE: STNG), at last month’s Capital Link International Forum in New York.
“It’s somewhat vague: Does that mean that one vessel or the whole fleet? Obviously, we haven’t tested those waters,” said Doyle.
Surging Russian crude exports to India, China
There were two concerns about Russian export flows in the runup to sanctions: that there wouldn’t be enough tanker capacity and that there wouldn’t be enough willing buyers for the cargoes. Neither is happening.
“There are no longer shipping constraints, as mainstream tanker owners appear confident to lift Russian barrels,” affirmed BRS.
Meanwhile, Russia is having no problems finding buyers for its crude or products. On the crude side, “Russian seaborne exports continue to look strong,” said I’Anson. “It’s basically a China and India trade at this point.
“Imports into China were at a record 1.46 million b/d [in March], surpassing the COVID-era totals. And India is taking Russian crude at a furious pace. Arrivals set a fresh all-time high at 1.75 million b/d in March. India, in particular, has surprised me by just how far they are pushing the envelope right now,” I’Anson told FreightWaves.
The concern on the Russian crude export side is that the price of oil globally could be pushed higher by the OPEC+ cuts or some other reason, dragging Russia’s discounted crude above the $60-per-barrel cap set by the EU and the G-7.
If that were to happen, Western tankers that entered the trade in recent months would be obligated by their insurers to pull out. According to Bloomberg, Russian crude is getting closer to the cap.
Russian diesel exports ‘set to stay strong’
Demand for Russian refined products has remained extremely strong.
Kpler data shows that Russian clean products exports in March were around 100,000 b/d higher than in December, despite a 1 million b/d decline in exports to the EU over those four months.
“It now looks like Russian exporters are managing to sell all their diesel,” said Benedict George, Argus’ associate editor for European products, during his company’s presentation earlier this month.
“They’re finding buyers around the world because it’s so cheap. There’s a two-tiered market for diesel globally, with Russian exporters getting a much lower price than everyone else.”
Russian diesel loading in the Baltic is around one-third cheaper than Brent crude. “That easily absorbs the extra freight cost,” said George. “So, in Brazil, Russian diesel is actually selling for 20 cents per gallon less than U.S. diesel even though it has to travel much farther to get there.
“Nobody anywhere in the world is paying anything close to the [diesel] price cap,” he said. The diesel price cap, which is currently set at $100 per barrel, would only be relevant “if the whole oil market rallies very significantly.”
All of which has kept Russian refineries chugging along. “Critically, and contrary to what a lot of people expected, Russia does not seem poised to shut down any refineries or even reduce throughput significantly,” said George.
The price discount on Russian crude is even steeper than on Russian diesel. Consequently, it makes sense for Russia “to keep as much crude as possible for its own refineries and sell the diesel it makes abroad. In other words, Russian refinery throughputs and diesel exports look set to stay strong.”
Who’s buying Russian diesel?
According to Argus, the biggest market for Russian diesel currently is Turkey, followed by North Africa, West Africa, Brazil and the Middle East.
George said that Turkey is now importing almost all of its diesel from Russia, supplanting previous imports from India, Greece and Italy.
The Middle East is using Russian diesel imports for domestic demand, “allowing its refineries to be able to export more of their own production,” said George.
Cargoes to Brazil are surging, with the longer voyage distance soaking up tanker capacity. Russian cargoes accounted for 18.5% of Brazil’s diesel imports in March, said Argus. That’s about to skyrocket. Russian diesel is predicted to account for 53% of Brazil’s April imports.
When EU diesel inventories wind down
EU diesel imports could drive the next big move in tanker markets.
The EU prepared for the ban on Russian diesel imports by bringing volumes forward. It loaded up inventories over the second half of last year. This had led to a downturn in imports more recently. EU clean product imports averaged 2.7 million b/d in March, down 1.1 million b/d or 29% from October, according to Kpler data.
The EU is not receiving nearly as much diesel as it normally would, because such large inventories were accumulated,” said George. “At the moment, the EU can afford to work its way through these inventories.
“When there’s not enough left, EU importers will need to bring in diesel cargoes from non-Russian origins in volumes we have not seen before.
“This means from the Middle East, India and potentially China. And when that happens, we would expect the top tier of this two-tiered [diesel] market — the non-Russian tier — to get much more expensive. And it will potentially also mean that clean product freight becomes more expensive. All of the tankers that are currently not being used to move diesel into Europe will have to be pulled into action.”
Source: Freight Waves by Greg Miller