Market seeks alternatives to Russian crude supplies

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The geopolitically exposed dirty tanker markets are likely to remain highly volatile through second quarter of 2022 as crude oil fundamentals remain uncertain.

Following the Russian invasion of Ukraine, several dirty tanker freight rates spiked to multiyear or all-time highs as uncertainty flooded into the oil markets.

Freight for the Baltic-to-UKC and the Black Sea-to-Mediterranean 80,000 mt routes reached $48.49/mt and $45.55/mt on March 7 and Feb. 25, respectively, the highest values ever recorded according to S&P Global Commodity Insights data.

The increased risk of dealing with a Russian entity and uncertainty over the repercussions of Russian sanctions have resulted in shipowners demanding heavy premiums to be compensated for the risk of engaging in the trade of Urals crude and sailing into territorial waters on the Black Sea.

On the chartering side, apart from increased freight costs, charterers were also being levied with the additional war risk premium, ranging from 2% to 5% of the ship’s hull and machinery value. Sources reported paying up to $500,000 in additional war risk premium for a single Black Sea cargo.

The conflict created a two-tier market, with very high premiums being paid in the Baltic and the Black Sea markets. However, the West African, Mediterranean and North Sea regions were slow to follow suit.

Some market participants argued that few shipping-based long-term effects of the conflict would even be felt outside the Russian export hubs.

“Rates should stabilize higher compared to the beginning of the quarter, but this would be a reflection of higher bunker prices rather than improved market fundamentals,” said one shipbroker source.

Market shuns Russian oil

Russia’s crude oil exports amounted to about 4.6 million b/d as of March 1, according to S&P Global data. Of that total, around 1.5 million-1.8 million b/d of Urals crude is shipped via the ports of Primorsk and Ust-Luga on the Baltic Sea, and via Novorossiysk on the Black Sea, according to the report. Russian oil supplies could fall by as much as 2 million b/d in March, as oil majors shun the country’s supplies.

On April 4, Russian Urals crude was assessed at a record discount of $34.84/b CIF Rotterdam to Dated Brent, on the back of very weak demand for the grade, according to S&P Global data. Under normal circumstances, despite the very high freight costs and the difficulty to secure credit lines, the steep discount of the grade would make it extremely attractive to buyers.

However, European refiners have been self-sanctioning Russian crude, and it remains to be seen where exactly Europe will source its lost barrels. Given Brent’s steep backwardation, traders and refiners are disincentivized from shipping their crude on long-haul trades.

However, Forties, Johan Sverdrup and Grane volumes in the North Sea — the closest substitutes to Baltic Urals — only amount to around 1 million b/d. Thus, European refiners will have to look elsewhere for sweeter alternatives.

Uncertainty surrounds supply shortage

OPEC and its allies posted their highest monthly crude oil output increase in February since July 2021, but the 19 members with quotas still fell 764,000 b/d short of their collective targets, according to the latest S&P Global survey.

Underinvestment by several member countries has resulted in supply constraints and unmet production targets set by the coalition. Nigeria pumped 1.55 million b/d of crude in February — 150,000 b/d below its quota. The only two producers with sufficient spare capacity are UAE and Saudi Arabia, with western powers pressuring the two countries to increase production and ease prices.

According to the International Energy Agency, its members hold emergency stockpiles of 1.5 billion barrels. In order to ease prices, the IEA on March 1 announced the release of 60 million barrels, enough to only cover a 30-day period at the estimated loss of 2 million b/d.

The minimal effect of IEA’s decision was reflected in the continued rise in oil prices, following the announcement. Dated Brent climbed to $137.64/b on March 8, the highest value recorded since July 2008.

Potentially, an inflow of barrels from Iran could aid supply, in case the US-Iran nuclear deal come to fruition. S&P Global projects that full sanctions relief by May could lift Iranian production by 750,000 b/d by August and allow 300,000 b/d of exports from storage.

Across the Atlantic, a spike in US shale output could also aid supply but would take time as producers are facing supply chain constraints, preventing short term increases in production.

In the long term, if European countries look to replace Russian crude oil imports from more distant producers, ton-mile demand would increase, leading to more sustainable improvements in freight rates. However, this assumption is largely dependent on consumers’ behaviour.

High oil prices sustained for a prolonged period might destroy demand, such as motorists using their cars less or switching to non-petroleum substitutes. According to the IEA, surging commodity prices will shrink demand growth by 1 million b/d in 2022.

Source: Platts