The Russia-Ukraine war has split the worldwide tanker business in two. The resulting market is sort of a high-stakes game of musical chairs during which each player is barely allowed to sit down in certain seats. If one country snaps up tanker flows, a competing buyer scrambles for the subsequent source — the subsequent chair meeting the geopolitical rules — and so forth.
Take the case of diesel. Prices have been on the rise again since July and are actually very strong in historical terms. Diesel is in high demand worldwide for trucking and other transportation, and for agricultural and construction equipment.
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 primary 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 interchange the Russian diesel it had just banned. The EU also brought in additional alternative diesel from the Middle East.
The music has just been cued up for Round 2 of the sport.
Russian domestic diesel demand is now particularly high due agricultural machinery consumption within the country’s south. Wholesale prices are rising. In response, the federal government halted exports and set no timeline for his or her resumption.
“Temporary restrictions will help saturate the fuel market, which, in turn, will reduce prices for consumers,” the federal government said on Thursday.
Brazil might want to shift buying to US
Russian clean products exports have averaged 1.57 million barrels per day (b/d) in September to this point, in line with Kpler, which uses ship-tracking data to measure seaborne volumes. Russian clean products exports have averaged 1.69 million b/d 12 months to this point.
Based on Maritime Strategies International (MSI), “Russia’s clean products exports are primarily comprised of diesel/gasoil and are a large component of the worldwide products mix.” MSI estimated that Russia’s clean products cargoes accounted for 7% of worldwide 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, in line with 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 alternative voyages “will liberate 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 mixture 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 industrial trade, potentially lowering freight rates,” said Frode Mørkedal, shipping analyst at Clarksons Securities.
Based on 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 when the usual market rates rally, they’re unlikely to achieve the degrees of the present Russian-origin rates.
“The freight market is starting to point out the primary signs of panic, as there may be major uncertainty over how long the ban may last,” he added.
The product tankers that remain within 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 amount of Russian naphtha to India is on the rise, freight rates will likely be lower “as ships operating on the route can have nothing else to do.”
EU could buy more diesel from Middle East
The EU has imported 3.12 million b/d of unpolluted products in September to this point and a mean of three.31 million b/d 12 months to this point, in line with Kpler data.
If the U.S. diesel that previously went to Europe goes to Brazil, where will Europe get its alternative diesel? This answer is more positive for tanker demand, particularly for larger product carriers specializing in longer voyages often called long-range 2 (LR2) tankers.
“There’s a definite upside to LR2 rates because the Middle East Gulf appears to be the place with probably 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 even be positive for LR2 tanker demand. Based on Reuters, Chinese diesel exports in January to August were up 197% 12 months on 12 months.
“A rise 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 by way of volume multiplied by distance.)
But Ollett doesn’t see China as a viable option for European diesel. “Diesel prices are going to need to get seriously high to make that journey economical. Never say never but that is very unlikely.”
He thinks it’s more likely that any China-to-Europe diesel cargoes could 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 lots of diesel and it’s lots of effort to get together a diesel cargo sufficiently big. You’ve 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 in consequence of the inefficiencies and uncertainties involved within the musical-chairs shuffle itself.
Based on MSI, “If the ban is sustained, the impact for the product tanker market is prone to be negative. Because the crude market has experienced, lower cargo volumes imply weaker fundamentals and earnings. Nonetheless, given the disruption to supplies and the already tight oil market going into Q4, we might even see some … volatility and potential upside for the product tanker market within the shorter term.”
Based on Omar Nokta, shipping analyst at Jefferies, “We view this development as supportive to product tankers as refineries globally are prone to be incentivized to ramp up throughput and/or defer scheduled maintenance to make up for the shortfall.
“While this may increasingly not [cause] a dramatic change in ton-miles, it does create disruption risk as ships are prone to be out of position, especially within the context of firm product tanker spot rates.”
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