With the EU embargo on Russian oil imports from December, Russia will have to find new homes for about 2.4 million barrels per day (bpd) of its exports of crude and refined products, which will be banned from entering EU and G7 countries unless the oil is sold at or below a certain price that the buyers expect to fix.
Even if the price cap mechanism does not work for the West, as many analysts expect, and even if Russia manages to divert all of its oil exports previously destined for the EU eastwards to the ‘Asia, this would create a shortage in the tanker market, sending ship rates soaring again. This would mean high oil prices, even for discounted Russian oil due to high freight rates. Moreover, available tankers not owned or tied to EU or G7 owners are simply not enough to handle Russia’s massive oil exports, analysts say. Changing trade routes with much longer journeys from Russia’s Baltic and Black Sea ports to Asia – instead of just a week to get to Europe – would also tie up more tankers during round trips of several months. More ships would be needed for ship-to-ship transfers from small Aframax tankers to very large crude carriers (VLCCs) to ship oil from very close ports in Europe to Asia.
Shipping Constraints
Although very optimistic for tanker owners and freight rates, the biggest shift in oil trading in recent memory would create additional headaches for buyers amid reduced tanker availability and higher prices in due to an increase in shipping rates.
Rerouting Russian crude from west to east would put a strain on the shipping industry, Giovanni Serio, global head of research at the world’s largest independent oil trader, Vitol, said this week.
The average route to Asia of at least 21 days is triple the trip to Europe, which will lead to an almost 3% increase in maritime activity measured in ton-miles, said Serio at the APPEC Oil Conference in Singapore, reported by Reuters.
Traders will struggle to find Aframaxes to load oil from Russian ports, the Vitol executive added.
“There’s already a lot of incentive to change Aframax’s vessel sizes to Vs (Very Large Crude Carriers) which will be more available,” Serio said, but noted that VLCCs will need to be loaded via ship-to-ship. transfers to load crude or product from smaller vessels.
‘Minefield’ price cap
In another hurdle for oil transport after the EU embargo and the entry into force of the price cap in December, traders and insurers are unclear on how the price cap mechanism would work and how many flows oil could be affected.
“We need buy-in from governments, and governments to guide us because it’s a bit of a minefield,” Vitol chief executive Russell Hardy told the APPEC conference. by Bloomberg. Related: Xi is set to be re-elected as China’s leader
Vitol will carefully assess the evolution of the price cap “before deciding exactly what we think is good for Vitol,” Hardy added.
Serio de Vitol noted that capping the price of Russian oil but allowing it to sink would be a “potential relief valve” for the global oil market.
Of course, if Putin does of course his promise to stop all energy supplies – including crude, fuels, natural gas and coal – to countries that commit to capping the price of Russian oil, “Russian oil will have to sail on non-Western tankers – and there are not enough ships to transport Russia’s millions of barrels,” according to energy intelligence.
Finding tankers and insurance coverage unrelated to the EU, G7 or other countries that could join the price cap mechanism for the amount of oil exported by Russia could be nearly impossible.
Reports have already emerged that India, which has been buying large volumes of Russian crude since the Russian invasion of Ukraine to take advantage of cheap oil, is configured to slow purchases Russian oil this month and look to more supply in Africa and the Middle East as shipping rates on longer trips have jumped.
After the EU embargo takes effect, India and China could theoretically absorb additional Russian oil, but the banking sector is wary of secondary sanctions from the United States, which could limit the capacity of Russia to export oil, Amrita Sen, founder and director of research at Energy Aspects, told Bloomberg television in a interview Last week. In addition, Russia tying up a lot of oil on ships to Asia and then finding buyers would further increase freight rates, she added.
Oil transportation bottlenecks?
Frontline, a leading tanker owner and oil transportation service provider based in Europe, said in a presentation at the Pareto Conference this month that volumes of oil in transit continue to grow at unusually high volumes for the season. The tanker market is now a “tonne-mile story” as the Russian invasion of Ukraine displaces crude and product trade flows, with “very inefficient business models developing”.
Global crude oil exports are approaching pre-Covid levels, while product flows and oil in transit are already there, Frontline said, adding that order books continue to shrink and there is no no incentives yet to invest in new tanker capacity.
It could be the start of structural bottlenecks in the transportation of upcoming oil, the owner of the tanker fleet said.
By Tsvetana Paraskova for Oilprice.com
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