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(Bloomberg) — Russia seems to be on the cusp of a debilitating oil-freight transportation drawback due to US sanctions, writes Bloomberg oil strategist Julian Lee.
On Jan. 10, the US Treasury sanctioned 161 oil tankers for his or her position in transferring Russian oil. It was a part of a raft of measures towards Moscow imposed by the outgoing Biden administration that President Donald Trump has but to dial down. Certainly, there seems to be an opportunity he’ll go even more durable previous to any Ukraine peace talks.
The price of discovering a tanker to hold Russia’s flagship Urals oil to Asia has already jumped by virtually 50% because the measures had been launched, based on knowledge from Argus Media. The hole between costs when the barrels depart Russia and arrive in Asia, a proxy for supply prices, have additionally soared.
READ: Russian Oil Falls Again Under $60 Worth Cap as US Sanctions Chunk
Whereas such surges occurred up to now, there was motive on the time to be cautious of how actual they had been. For instance, inflating supply prices would have been a intelligent manner of constructing it seem like exported cargoes price $60-a-barrel or much less — even when the sale worth upon supply to Asia was greater.
Doing that will have certified the cargoes for entry to western companies together with tankers and insurance coverage whereas nonetheless permitting barrels to finally be bought far above a Group of Seven worth cap.
There’s no strategy to show that that type of overstating of freight charges did or didn’t occur. There was merely a monetary incentive to do it. Likewise, there’s no manner immediately to show or disprove that the identical factor isn’t taking place. Certainly, the identical incentive to recreation the numbers nonetheless exists.
What’s modified is the huge fleet of tankers now beneath sanction, and indicators that freshly blacklisted ones are beginning to get disrupted — simply as these positioned beneath prior measures additionally struggled for employment. It’s very doable that Russia’s true freight prices actually are about to spiral.
There at the moment are 265 tankers blacklisted by at the least one of many US, EU or UK (with a US itemizing being by far essentially the most disruptive to buying and selling). Prior American measures by and enormous stopped the focused vessels from buying and selling.
The measures hit refined merchandise carriers in addition to these hauling crude.
Even so, out of 435 vessels that carried Russian crude in 2024, 112 of them, or 26%, are now subject to sanctions imposed by Washington. Add in the ones targeted by London and Brussels and the proportion rises to 37%.
But that understates the problem facing the Kremlin. With 80% doing repeat cargoes (and some as many as 20), the tankers sanctioned by the US hauled 45% of all seaborne Russian crude shipments last year. Add in the vessels hit by the UK and European Union, but not the US, and 57% of Moscow’s crude shipments were carried on vessels that are now blacklisted.
And even that might not be enough. Some tankers designated for moving Iranian oil — including two on Thursday — had also transported Russian barrels.
These kinds of numbers represent a gaping hole in the shadow fleet of tankers that Russia assembled to move its oil and they make it imperative to find alternative vessels.
To be clear, Russia has so far largely worked around prior sanctions and kept its vast export program steady. It is this huge volume of oil for which it needs to find tankers.
The net result is an increase in freight bills that may just be starting, especially if other owners — previously cold to the trade — need additional incentives to take the risk of falling foul of future sanctions. It’s also likely to make it more expensive to acquire the next batch of ships to supplement the shadow fleet and fill the hole created by the sanctions.
Indeed the idea of buying second hand ships to sort out the problem — is questionable. If you are an intermediary considering working with Russia, or even Russia itself, what’s the point of spending billions of dollars or dirhams on second-hand tankers, only to see them sanctioned?
When the ‘delivery spread’ and freight costs boomed previously, there was nothing close to the kind of restriction on tanker supply that Russia faces today.
Russia’s apparent spot-market freight bills are already punishing, at $10 a barrel from the Black Sea to India and as much as $13 from the Baltic, according to Argus.
That’s not yet at the level it reached in the weeks immediately after the introduction of the price cap — when the Baltic to India trip cost more than $20 a barrel — but it’s risen by $4.20 a barrel, or 48%, since Jan. 10.
Importantly, some sanctioned ships are already failing to deliver efficiently. Several of the blacklisted ones that remain in use are just sitting off the Russian coast, or outside the ports in China where they’re supposed to discharge, others are offloading into larger vessels near Russia for storage.
Some are en route to their destinations and it will be interesting to see what they do once they’ve delivered.
Sanctioned ships may provide a source of possible storage vessels, but the potential for future fleet curtailment is clear. It’s also questionable whether owners of vessels that are not blacklisted will be willing to collect cargoes from those that are.
If this kind of disruption happens at scale, with the significant numbers of additional shadow fleet ships having been sanctioned, then Russia’s freight challenges could become crippling.
And history shows that that is a very real possibility.
NOTE: Julian Lee is an oil strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.
–With assistance from Tom Fevrier.
