Russian Oil Sanctions Send Prices Of Old Tankers To New Records

Tyler Durden's Photo
by Tyler Durden
Tuesday, Dec 06, 2022 - 04:20 PM

There has been a veritable cornucopia of "unintended consequences" in the event frenzy of 2022, and here is another.

Now that the European Union has banned all seaborne Russian crude imports from Dec. 5 (with a fuel import ban to follow in February) and also banned companies and individuals in the bloc from providing financing, brokerage, shipping and insurance services to ship Russian oil elsewhere if the crude was bought above a price cap of $60 a barrel (which Russian Urals crude is currently trading below), the market for old oil tankers is booming, amid self-defeating efforts by Western nations to curb trade in Russian crude.

Because while Europe happily purchases "banned" Russian oil and gas resold from India and China (at a huge markup), its actions have served as a gold mine for a creaky - literally - subsector of shipping, and as Western shipping and maritime services firms now steer clear of Russian oil to avoid falling foul of sanctions or harming their reputations, new companies have leapt into the void, and they're snapping up old tankers that might normally be scrapped.

As Reuters reports, ageing tankers have been sold in recent months by Greek and Norwegian owners for record prices to pop-up Middle Eastern and Asian buyers taking advantage of sky-high charter prices for vessels willing to ship Russian oil to India and China.And it is not some Chinese backwater sweatshop but rather reputable tanker management companies such as Fractal Shipping, run out of Swiss financial hub of Geneva, that are reaping the rewards of Europe's virtue signaling policies

In less than a year, Fractal has put together a fleet of 23 oil and fuel tankers bought recently by owners in Dubai. Most are taking Russian crude from Baltic and Black Sea ports to Asia, Refinitiv Eikon ship tracking showed.

Chief Executive Mathieu Philippe said he launched the idea for Fractal a year ago, betting that the global tanker fleet was getting stretched and that both the cost of vessels and freight rates would inevitably rise from pandemic lows. Or maybe he just read what Zoltan Pozsar correctly predicted in March about the coming surge in tanker prices and shipping rates as companies front ran the coming frenzy to evade Russian sanctions. Whatever the reason, by the middle of 2022, new ship owners, known as principals, started asking him to get into the Russian oil business.

"We were given a lot of tankers in August and September. Our principals wanted to come into the business for the Russian opportunity," the shipping industry veteran told Reuters.

Major Western oil companies typically stop using tankers when they are about 15 years old, and many would be scrapped. Fractal's fleet, meanwhile, consists entirely of older vessels ranging from 13 to 19 years, Fractal's website shows.

And with new entrants keen to get a slice of the Russian business, second-hand oil tanker prices have surged, especially for Aframax vessels that can carry up to 600,000 barrels, the standard size used for loading crude at Russia's Baltic ports.

The price tag for 20-year-old Aframaxes has jumped 86% from $11.8 million on Jan. 1 to $22 million now, according to valuation company VesselsValue.

So far this year, 148 Aframax sales have been reported, a 5% increase from the same period in 2021, VesselsValue said. Research by ship broker Clarksons showed that more tankers were sold in the first 11 months of 2022 than any full-year previously and sales in October set a new monthly record of 76.

However, there could be complications:  until Dec. 5, there were no Western sanctions on transporting Russian oil to Asian markets, so Fractal and other management companies had not breached any rules. To avoid potential pitfalls, though, Philippe said Fractal does not deal with any Russian-owned companies. That would also be a no-go for Western banks financing maritime trade, he said.

To prevent the new EU sanctions from halting millions of barrels per day of Russian crude exports and driving up global fuel costs, the Group of Seven (G7) rich nations has mitigated its impact by permitting exports below a cap of $60 a barrel. The aim of the plan is not so much to reduce Russia's export revenue but to keep oil supplies flowing, even if the plan is repackaged for public consumption as a noble attempt to crush Putin's primary revenue stream.

The agreement on the price cap means operations such as Fractal's can carry on shipping Russian crude without any issues, as long as the deals are below the cap. That said, the Kremlin has repeatedly said it will not sell oil below the new price cap while Russia's two biggest buyers, China and India, have not promised to abide by the limit.

Meanwhile, new ship owners willing to transport Russian oil are cashing in on the record arbitrage created by the Western virtue-signaling sanctions. "Ships earning $80,000 a day in the Mediterranean can make $130,000 a day if they carry Russian oil," one ship broker told Reuters.

Crude tanker rates have jumped to highs not seen since 2008, aside from a brief period in 2020 when oil firms scrambled for tankers to store fuel as demand crashed due to the pandemic.

Tanker owners can make more than $100,000 a day for some journeys, said Omar Nokta, analyst at investment bank Jefferies.

"While it remains to be seen how the price cap on Russian exports will ultimately play out, what is clear is that the tanker fleet is becoming stretched and travelling longer distances," he said, echoing again what Zoltan Pozsar predicted would happen 9 months ago.

And as Pozsar also predicted, more tankers are now being used for voyages taking weeks, shipping Russian oil from the Baltic and Black Sea to Asia, whereas Russian oil was mainly sold in Europe previously and the voyages only took a few days.

Adding to the upward price pressure, shipbuilding also stalled during the pandemic and deliveries of new oil tankers next year are set to be historically low, according to analysis from shipping brokers.

Reuters monitored 18 of Fractal's tankers using Refinitiv Eikon ship tracking data. Twelve have loaded oil at Russian ports in the last two months either for the first time, for the first time since the Ukraine war started, or at least for the first time in over a year, the data showed. Two have been calling regularly at Russian ports.

For instance, the Fractal-managed Charvi tanker loaded crude at Russia's Baltic port of Primorsk in the middle of September before sailing to discharge its cargo in Sikka, India.

The tanker formerly owned by Norway's Viken Shipping under the name Storviken had never previously called at a Russian port, Refinitiv Eikon data going back to 2010 showed.

Charvi tanker, formerly known as Storviken

Similarly, Daphne V another tanker previously owned by Viken Shipping and now managed by Fractal called at Primorsk on Nov. 11 for the first time since the Ukraine war started and is heading to the Suez Canal en route to Asia. The tanker was called Kronviken before it changed hands. Viken Shipping said it had not sold ships to Russian owners but declined to identify the buyers.

Ship broker Braemar estimated that about 120 of the 212 tankers sold to likely Russian buyers this year were looking at Russian crude oil trades, while there were virtually no sales last year to buyers involved in shipping Russian crude.

Adding to the confusion over the ban, the U.S. Treasury has provided only token guidance about how the cap will work, but questions remain over its enforcement. 

"The price cap is very confusing," Fractal's Philippe said. "We are definitely one of the companies that want to remain in the Russian trade. As businessmen we have to be opportunistic."

The biggest joke after all the oil price cap fanfare is that according to Reuters, buyers must provide documents such as invoices to shipping companies or insurers to show they stuck to the cap but it will be essentially down to self-monitoring, with no penalties for providers of shipping services if they operated in good faith. One can imaging how efficient self-monitoring will be when there are millions of dollars daily on the line for those who breach the rules.

To be sure, deals proven to be outside the price cap would effectively break sanctions, and other vessels that have at some point been involved in circumventing oil export sanctions on Venezuela and Iran may well play a part in that trade, analysts say.

Hilariously, one aim of the G7 price cap plan is to prevent this so-called 'dark fleet' getting bigger by allowing Russian oil exports to take place transparently without breaking sanctions. The reality is that said dark fleet will only get bigger.

This dark fleet, which accounts for about 10% of the world's oil tankers according to Trafigura and other shipping industry sources, helped Iran circumvent a U.S. embargo for the better part of a decade, and Venezuela since 2019, as Western nations collectively looked away knowing full well what was going on.

Which is why, smelling an uncollected fortune in the water, at least 21 tankers have switched to shipping Russian oil after previously being used for Iranian shipments, said Claire Jungman, chief of staff at U.S. advocacy group United Against Nuclear Iran (UANI), which monitors Iran-related tanker traffic through ship and satellite tracking. Of those vessels, at least have four changed ownership in recent months.

Ship broker Braemar also said that some of the vessels involved in shipping Iranian and Venezuelan oil were shifting to transporting Russian oil.

It estimated that the so-called shadow fleet shipping oil from those two countries and some of them also for Russia was made up of 107 Aframaxes, 65 larger Suezmaxes and 82 VLCCs (Very Large Crude Carriers).

"Instead of having one optimised fleet you now have two separate optimised fleets," said Christian M. Ingerslev, chief executive of Denmark's Maersk Tankers.

"If sanctions are continually adjusted, it becomes very difficult for the sanctions compliant companies to take the risk because they don't know what will happen tomorrow," he said.