March 2, 2022

Russian oil exports continue for now despite trading constraints and declining vessel availability

The Russian war in Ukraine is in its seventh day and financial sanctions on Russian individuals and banks are set to cripple the financial sector. Energy exports have not been the target of sanctions and even though the effect has made buyers and shippers wary, trade volumes have been unmoved so far as current loadings would have traded and had vessels fixed before the invasion. But, with Urals hitting a new record discount to Brent, finding buyers over the coming weeks is set to become increasingly difficult.

Seaborne loadings of commodities from Russia have continued largely as normal over the last seven days, despite mounting sanctions making transactions more difficult and the logistical constraints resulting from shipowner concerns for vessel and crew safety and insurance coverage.

SWIFT sanctions and ship insurance cause trading headaches

On 27 February, the US, EU and allies agreed to restrict select Russian banks from accessing SWIFT. This is not intended to impact Russian energy trade as it was made clear it will exclude banks used in making energy purchases, however until the ban is implemented by SWIFT and all the entities which are subject to the ban are known, it will make buyers wary of purchasing Russian oil and gas.

In addition to escalating sanctions, securing ships willing to load at Russian ports in the Baltic and Black Sea is causing a spike in freight rates. A combination of concerns over infringing sanctions and war risk premiums is deterring many owners from operating in the regions or engaging with Russian ships, until there is greater certainty. Premiums for Aframaxes in the Baltic and Black Sea have reached $500,000.

Baltic and Black Sea exports unaffected, for now

Since 24 February, Russian Black Sea crude exports have remained at around 2 mbd, which is consistent with exports before the invasion, with both the CPC and Sheskharis terminals operating normally. Clean product exports from Russian Black Sea ports are also in-line with pre-invasion levels at 520 kbd while DPP exports are trending sideways at around 1 mbd.

It's a similar picture in the Baltic. Crude exports from Russian ports remain around 1.5 mbd. Clean product exports are at around 1.3 mbd, unchanged from the prior week, while DPP exports continue to average around 800 kbd.

Urals widening discount to Brent points to the difficulty in finding buyers

Exports in recent days will have been agreed prior to the invasion with ships fixed well in advance, so the real test of whether Russian exports can hold steady will begin to show in the coming weeks. Already there is evidence cargoes are struggling to find buyers. Medium Sour Urals is a key baseload crude in Northwest Europe and cannot be replaced from within the region in sufficient quantities, but refiners are showing reluctance, pushing the discount to Brent to -$13/bl yesterday, a new record low. This should encourage buyers from outside the region, particularly Asia to step in, despite the long voyage and steep backwardation. Today, China issued orders to increase energy purchases as a result of concerns for security of supply over potential disruptions from the Ukraine war. This could see China ramp up imports of Urals.

Russian Baltic crude exports (kbd) and Urals to brent spread ($/bl) - Source: Kpler

For Europe, sourcing alternative supplies of gasoil cargoes is more problematic. Outside of Russian gasoil, the nearest source is the Middle East or India. These are significantly longer voyages than from the Baltic or the Black Sea which due to the current steep backwardation in gasoil, make the arbitrage economics more complicated as the cargo will be worth less than at the time it was shipped. The prompt east to west gasoil spread has slumped to -$81/mt, as eastern prices have struggled to keep up with the spike in the west.

Exodus of vessels from the Baltic and Black Sea but freight rates push higher

While exports continue, the number of tankers operating in the Black Sea is falling, having dropped from 251 on February 23 to 208 today. Looking at just the Aframax and Suezmax vessels, which exclude the large number of small tankers which are permanently based in the Black Sea, the number has dropped from 60 to 43.

This is reflected in a drop in new vessels arriving and an increase in vessels exiting the region. Concern among many among owners about operating in the region and loading Russian crude and products will continue to keep the number of vessels operating in the region below historical levels. Since 25 February there have been just six Aframaxes and three Suezmaxes arrive in the Black Sea. Most are due to load crude from Novorossiysk in the coming days. For MRs, there have been 13 arrive over the same period, six previously carrying clean and seven previously carrying DPP.

Last week, the Greek shipping ministry advised Greek-flagged ships to leave Ukrainian and Russian territorial waters in the Black Sea. This does not appear to have been heeded, with numerous Greek-owned vessels still loading Russian crude in the region. Indeed, Greek-owned vessels have been some of the most common non-Russian-owned ships willing to continue loading from Russia since the invasion.

There has also been a similar drop in vessels in the Baltic. Russia accounts for virtually all crude exports from the region and between 60% to 80% of clean and DPP exports. There have been 12 Aframaxes arrive in the Baltic in the last six days and 12 MRs.

Number of Suezmax and Aframax vessels arriving and leaving the Black Sea (7 day rolling average) - Source: Kpler

As a result of the drop in vessels operating in these regions, freight earnings in the Black Sea and Baltic continue to soar. Suezmax earnings in the Black Sea reached $157,000/day yesterday, while in the Baltic, Aframax earnings reached $209,000/day, Baltic Exchange data shows.

Displaced ships will increase vessel supply in other load regions

The rising freight market in Europe is lifting earnings across the board; VLCC earnings on the Middle East to China route are up to $8,873/day yesterday according to the Baltic Exchange, up from -$8,273/day last week.

But, as the vessels displaced from the Baltic and Black Sea markets arrive in other load regions there will be greater competition for loads. At present, there has been broadly no change in crude or products export volumes as a result of the war, so the firming in rates on routes unrelated to Russia could come under downward pressure in the next week. A two-tier market will likely begin to emerge, with high premiums paid for Russian loads and non-Russian routes dropping back.

Russian ships getting turned away

Outside of formal sanctions, earlier this week, the UK secretary of state for transport wrote a letter to all UK ports asking them not to provide access to any ship owned, controlled, chartered or operated by any person connected with Russia. This informal ban is specifically related to Russian vessels and does not restrict imports of Russian oil or LNG. The Sovcomflot-owned Christophe de Margerie, which is carrying LNG from Russia’s Yamal, diverted from the UK Isle of Grain to France’s Montoir on the day of the announcement. No other Sovcomflot vessels were declaring for UK ports ahead of the announcement.

Russian vessels are finding they are unwelcome in most European ports now, even if unofficially. This could see an increase in the need for ship-to-ship transfers before the cargo is able to be discharged.

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