Brent prices, which surged past the $85 per barrel mark after the voluntary production cut by OPEC+, have dipped below $75 per barrel because of rising concerns over global economic health. Nonetheless, the market could head towards tight supply in 2H23 if OPEC+ continues with the ongoing voluntary production curbs as demand is likely to surge, led by China.
Although we believe OPEC+ might roll back the voluntary production curbs if the market remains in deficit for long in 2H23, any surge in oil prices will increase the odds of Russian crude prices breaching the G7 price cap of $60 per barrel.
The oil price cap bans the G7 and EU companies from providing transportation, insurance and financing services for Russian crude oil if it is sold above $60 per barrel. Since the sanctions came into force on 5 December 2022, many Western companies have provided services to vessels carrying Russian oil traded below the cap. However, getting insurance and other services from the G7 and EU players will be difficult if higher global oil prices take Russian crude above the price cap.
Recently, Lloyd’s Register stated that it will revoke certification for 21 vessels of Gatik Ship Management by 6 June. In addition, St. Kitts & Nevis International Ship Registry had deflagged 36 vessels of the same company in May. Gatik Ship Management has emerged as one of the main carriers of Russian crude accounting for about 6% of the total Russian crude loaded this year. Although the exact reasons behind these decisions of Lloyd’s Register and St. Kitts & Nevis International Ship Registry have not been stated clearly, the possibility of a breach of the price cap cannot be ruled out.
With the lack of independent means to track the value of the cargo, service providers will be reluctant to deal with ships carrying Russian cargo, especially if oil prices surge in 2H23. Although Russian crude trade through vessels using insurance and financial services outside the G7 or EU countries is not subject to direct sanctions, there are limited alternatives for these services, which will make the Russian crude trade a bit more difficult in the high-price environment. In such a scenario, we expect a wide gap in freight rates for vessels carrying Russian and non-Russian cargo creating a clear two-tier charter market.
Moreover, the possibility of a surge in grey trade and a rise in ship-to-ship transfers cannot be ruled out. Any possible rise in grey trade will increase the inefficiency of the crude tanker fleet, squeezing the already tight supply. Although any significant supply deficit in the oil market will cap the global crude trade growth because of a drawdown in inventories, the tonnage supply squeeze in the crude tanker market because of a likely increase in inefficiency will keep freight rates firm in 2H23.