The Ukraine-Russia war has already shaken up global energy markets. Sanctions finalized Friday by the EU will shake it up a lot more — not only for the tanker industry but also for American diesel and gasoline consumers.

The U.S. banned imports of Russian crude and products in early March. The new EU sanctions will end Europe’s imports of Russian seaborne crude by Dec. 5 and imports of refined products by Feb. 3, 2023.

Perhaps even more importantly, the EU will phase in bans on EU insurance, reinsurance, technical services or any financial services for tankers carrying Russian crude and products to any country, including current buyers in China and India, over the same time frames. The U.K. is also set to ban insurance and reinsurance for such tankers.

Over 90% of the world’s ships are insured in Europe and the U.K. The insurance ban could have “a dramatic impact on seaborne trade of Russian oil and oil products,” said brokerage and consultancy Poten & Partners. “The potential implications cannot be overstated.”

Russia crude exports

What does the new EU import ban have to do with U.S. fuel buyers? And how could tanker owners be affected?

Since the war began, Russia has been able to keep its crude exports flowing. It is replacing lost sales to the West with sales to India and, to a smaller extent, China.

Even before the ban, the EU has replaced 1 million barrels/day (b/d) in crude purchases from Russia, according to a Morgan Stanley report on Monday. But “there are limitations to the degree this ‘swap’ can extend further,” it said. As a result, it expects Russian crude production to decline by 1 million b/d by year-end.

Lower crude production in Russia — to the extent it’s not replaced by OPEC, the U.S. and others — is a tailwind for oil prices.

In tanker trades, the longer distance traveled by post-invasion Russian cargoes has boosted spot freight rates for Aframaxes (tankers with capacity of 750,000 barrels) and Suezmaxes (1-million-barrel capacity). These small and mid-sized tankers can be accommodated at Russian terminals.

To the extent Russian cargoes are eventually replaced by Middle East exports, tanker demand would shift toward higher-capacity VLCCs (very large crude carriers; tankers with 2-million-barrel capacity), according to Evercore ISI analyst Jon Chappell.

Yet there are a lot of moving pieces. Ship brokerage BRS made the counterargument Tuesday that the EU would source more crude from the U.S. — cargoes largely carried on Suezmaxes — leaving less U.S. crude to be exported to Asia aboard VLCCs.

Russia diesel exports

The Russian export situation is much different in the refined product sector, particularly for diesel, than for crude, according to Morgan Stanley.

With the EU ban on top of the U.S. ban, Morgan Stanley believes Russian petroleum products will have a much harder time finding sufficient alternate buyers.

“If [Russian] refineries indeed struggle to find alternative buyers, it is likely that their own production would need to decrease. It seems likely that both crude oil production and refinery runs will decline over time, reducing supplies of both crude [and products] — especially diesel — to the rest of the world.”

To the extent lost Russian flows can’t be replaced by new refinery output elsewhere, that’s more bad news for diesel buyers. The average retail price of diesel in the U.S. hit a new record high of $5.703 per gallon this week.

How new EU sanctions on Russia will shake up global energy trade 1
Chart: FreightWaves SONAR (To learn more about FreightWaves SONAR, click here.)

EU restrictions on shipping insurance

Those outside of shipping circles may not yet grasp the significance of the EU (and expected U.K.) ban on insurance for ships with Russian crude and products cargoes bound for non-EU destinations.

“This is a critical measure” that will affect “a significant portion of the global tanker fleet,” emphasized Poten & Partners.

“This will likely prevent many mainstream owners from lifting Russian cargoes,” said BRS.

‘Illicit’ trade to surge?

When the U.S. levied sanctions on tankers carrying Iranian and Venezuelan crude, exports ultimately kept flowing. Cargoes were loaded aboard older tankers with obscured ownership and no Western insurance and finance ties. Transactions were not conducted in U.S. dollars.

Tanker owner Euronav (NYSE: EURN) frequently highlights this issue on conference calls, referring to it as the “illicit trade.” At last count, Euronav estimated that this fleet had stabilized at around 55-60 elderly VLCCs, plus around 30 Suezmaxes.

In order to maintain export flows after EU sanctions kick in, Russia and/or its cargo buyers would have to find enough replacement tankers, either by using already sanctioned Russian vessels or tapping the “illicit” fleet.

According to BRS, “Although [the insurance ban] will discourage mainstream tanker owners from lifting cargoes, it will not likely discourage niche tanker owners whose vessels are already involved in the transport of illicit Iranian and Venezuelan oil.”

The question is: Are there enough tankers available to trade in this legally grey market, beyond those already serving Venezuela and Iran? Poten estimated that “if the insurance ban takes most of the international fleet out of the equation,” Russia would need to obtain services of 20 Aframaxes, 51 Suezmaxes and 43-48 VLCCs.

“Finding these vessels and arranging insurance could be very challenging,” warned Poten. “It may also make it difficult for these vessels to get employed in regular international oil trades.”


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By Greg Miller