The Russia-Ukraine war has split the global tanker business in two. The resulting market is like a high-stakes game of musical chairs in which each player is only allowed to sit in certain seats. If one country snaps up tanker flows, a competing buyer scrambles for the next source — the next chair meeting the geopolitical rules — and so on.
Take the case of diesel. Prices have been on the rise again since July and are now very strong in historical terms. Diesel is in high demand worldwide for trucking and other transportation, and for agricultural and construction equipment.
(Chart: FreightWaves SONAR)
Russia is the world’s second-largest seaborne supplier. Its exports were sanctioned by the Group of Seven nations and the European Union on Feb 5. Then, on Thursday, Russia halted exports of its diesel (and gasoline) altogether.
In the first round of musical chairs — driven by the Feb. 5 sanctions — Russian diesel that previously went short-haul to the EU was rerouted to Brazil, Turkey, Africa and the Middle East. U.S. diesel that previously went to Brazil switched to the EU, which needed it to replace the Russian diesel it had just banned. The EU also brought in more replacement diesel from the Middle East.
The music has just been cued up for Round 2 of the game.
Russian domestic diesel demand is now particularly high due agricultural machinery consumption in the country’s south. Wholesale prices are rising. In response, the government halted exports and set no timeline for their resumption.
“Temporary restrictions will help saturate the fuel market, which, in turn, will reduce prices for consumers,” the government said on Thursday.
Brazil will need to shift buying to US
Russian clean products exports have averaged 1.57 million barrels per day (b/d) in September to date, according to Kpler, which uses ship-tracking data to measure seaborne volumes. Russian clean products exports have averaged 1.69 million b/d year to date.
(Chart: FreightWaves based on data from Kpler)
According to Maritime Strategies International (MSI), “Russia’s clean products exports are primarily comprised of diesel/gasoil and are a sizable component of the global products mix.” MSI estimated that Russia’s clean products cargoes accounted for 7% of global flows in August.
“Brazil is a key destination for Russian diesel,” said John Ollett, deputy editor of freight at price-reporting agency Argus. Brazil sourced 77% of its August diesel imports from Russia, according to Argus data.
“An end to [Russian] exports will force Brazil to look back to sourcing material from the U.S., which is a much shorter journey,” Ollett told FreightWaves.
Cargoes are carried aboard medium-range (MR) product tankers. The shorter distances of the replacement voyages “will free up ships to repeat the journey more often, putting MR freight rates under pressure,” said Ollett.
‘First signs of panic’ in tanker markets
Meanwhile, the product tankers that previously transported Russian diesel and gasoline suddenly have far fewer cargoes to load. These vessels are a mix of so-called “shadow fleet” tankers and European tankers that carry Russian cargo under the G-7/EU price-cap regime.
A portion of the fleet serving Russian cargoes has already been pushed out of the trade because Russian diesel has exceeded the $100-per-barrel price cap since late July. The Russian export ban will force more vessels out of the higher-paying Russian trade and into mainstream service, increasing competition, a negative for mainstream rates.
“In Europe, some vessels that were previously transporting Russian products may re-enter commercial trade, potentially lowering freight rates,” said Frode Mørkedal, shipping analyst at Clarksons Securities.
According to Ollett, “Shipowners operating on the Russian-origin routes could see their profits collapse as they return to the regular market, where rates are lower. Even if the standard market rates rally, they’re unlikely to reach the levels of the current Russian-origin rates.
“The freight market is starting to show the first signs of panic, as there is major uncertainty over how long the ban may last,” he added.
The product tankers that remain in the Russian-origin trade are likewise in trouble.
“Rates could slide sharply as product exports for gasoline and diesel halt and vessels are left to compete for Russian naphtha shipments [which are not covered by the export ban],” said Ollett. While the volume of Russian naphtha to India is on the rise, freight rates will likely be lower “as ships operating on the route will have nothing else to do.”
EU could buy more diesel from Middle East
The EU has imported 3.12 million b/d of clean products in September to date and an average of 3.31 million b/d year to date, according to Kpler data.
(Chart: FreightWaves based on data from Kpler)
If the U.S. diesel that previously went to Europe goes to Brazil, where will Europe get its replacement diesel? This answer is more positive for tanker demand, particularly for larger product carriers specializing in longer voyages known as long-range 2 (LR2) tankers.
“There’s a definite upside to LR2 rates as the Middle East Gulf seems to be the place with the most extra diesel available,” said Ollett, noting that LR2s “are key” for voyages from the Middle East Gulf to Europe, Asia and Brazil.
More long-haul exports of diesel from China would also be positive for LR2 tanker demand. According to Reuters, Chinese diesel exports in January to August were up 197% year on year.
“An increase in Chinese exports [due to the Russia ban] could have a net positive impact on ton-miles,” said Mørkedal. (A ton-mile is a measure of shipping demand in terms of volume multiplied by distance.)
But Ollett does not see China as a viable option for European diesel. “Diesel prices are going to have to get seriously high to make that journey economical. Never say never but that is highly unlikely.”
He thinks it’s more likely that any China-to-Europe diesel cargoes would be carried aboard newly built very large crude carriers that had yet to contaminate their tanks with their first crude load.
“The caveat here is that 400,000 tons is a lot of diesel and it’s a lot of effort to get together a diesel cargo big enough. You have to fill the vessel by a certain percentage or it’ll be too light and capsize.”
Possible rate upside from trade disruptions?
Some analysts see potential upside for product tanker rates as a result of the inefficiencies and uncertainties involved in the musical-chairs shuffle itself.
According to MSI, “If the ban is sustained, the impact for the product tanker market is likely to be negative. As the crude market has experienced, lower cargo volumes imply weaker fundamentals and earnings. However, given the disruption to supplies and the already tight oil market going into Q4, we may see some … volatility and potential upside for the product tanker market in the shorter term.”
According to Omar Nokta, shipping analyst at Jefferies, “We view this development as supportive to product tankers as refineries globally are likely to be incentivized to ramp up throughput and/or defer scheduled maintenance to make up for the shortfall.
“While this may not [cause] a dramatic change in ton-miles, it does create disruption risk as ships are likely to be out of position, especially in the context of firm product tanker spot rates.”
Click for more articles by Greg Miller
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