The price of Russian Urals crude, exported from Black Sea and Baltic Sea ports, is now at or above the ceiling price of $60 a barrel set by the Group of Seven and the European Union. If it stays there or increases further, European tanker owners and their British insurers will not be able to legally participate in this lucrative maritime trade.
“The violation [of the] the price cap could have significant ramifications for Russian-origin oil which continues to be transported in international tonnage,” shipbroker Braemar said Friday.
The price cap was put in place on December 5. The Urals flirted with $60 in April, but world prices fell over the following months, pulling the Urals from the brink. This month, oil prices rose as the Urals’ discount to the global benchmark, Brent, declined.
The Urals have risen above $60 by pennies since Wednesday, the first time it has done so since the cap plan was implemented, according to data from pricing agency Argus. (Russian ESPO crude loaded in the Pacific has always exceeded the cap.)
The question for Western governments is: will there be enough tonnage of non-Western tankers available to maintain Russian export flows, preventing a further rise in global oil prices that negatively impacts consumers? ?
Questions for the oil markets: Will an exodus of European tankers from Russian trades weigh on freight rates in non-Russian trades by injecting more tonnage? And will the new restrictions on Russian trade mean that non-Western tankers – the so-called “ghost tankers” – will earn an even higher premium?
The shock could be “less dramatic” than expected
“If the price persists above $60 a barrel, players transporting Russian crude may have to rely increasingly on the ‘ghost fleet,'” Sheel Bhattacharjee, head of European freight at Argus, told FreightWaves. .
“This is likely to widen the freight gap between Russian cargoes and the general market. However, the Ghost Fleet can grow if the incentives are there. Thus, there may be enough vessels to carry the Russian volumes, especially after the recently announced cuts in Russian oil production.
As a result, Bhattacharjee said, “the initial shock may turn out to be less dramatic than some think, and the market is likely to rebalance again even if the Urals price remains above the long-term ceiling. “.
According to data from Kpler, Russian crude exports by sea averaged 3.4 million barrels per day (bpd) in June, down 12% from May to reach the monthly volume. the lowest since December. Maritime exports in the first half of July averaged 3.2 million bpd, down 7% from June.
Even so, Russian crude export flows are still above pre-invasion levels. Average maritime exports in June and July are up 4% compared to June-July 2021.
“Moscow has promised a further reduction of 500,000 bpd in its exports in August,” the International Energy Agency (IEA) announced on Thursday. IEA data shows that virtually all Russian crude exports continue to go to just two countries: China and India.
Tanker owners earn huge bonuses in Russia
Russian crude is loaded on board Aframax (tankers that transport 750,000 barrels) or Suezmax (capacity of 1 million barrels). They either sail directly to India or China or they do ship-to-ship transfers to very large crude oil carriers (2 million barrel capacity) who handle the long-haul segment.
If the Urals price breaches the cap for an extended period, forcing Western tankers out of trade, remaining non-Western tankers could reap higher premiums. Russian freight premiums are already very high. Average freight rates for Aframax and Suezmax have been falling globally since April. Aframax and Suezmax fares carrying Russian oil fell less, increasing the freight gap.
Argus launched a new product this year that compares weekly Russian crude export freight rates to a non-Russian benchmark. It shows that in the first week of July, an Aframax loading 80,000 tonnes of Russian Urals into the Black Sea port of Novorossiysk for delivery to western India brought in $3.68 a barrel freight more than a basic tanker. That’s a 90% premium – meaning an Aframax earns almost twice as much in this Russian trade as it could anywhere else.
The cost of transporting 140,000 tonnes of crude on a Suezmax from Novorossiysk in northern China was $3.17 a barrel above the benchmark, a premium of 76%, data showed. Argus.
In the Baltic Sea, the freight cost for a 100,000 tonne cargo from Russian Urals loaded onto an Aframax in the first week of July at the port of Primorsk for delivery to western India exceeded the level of non-Russian benchmark of $3.89 per barrel or 87%.
Ural-Brent spread halved since January
The breach of the price ceiling occurred as world oil prices rose. Brent has just exceeded 80 dollars a barrel for the first time since the end of April. OPEC+ producer cuts could put additional upward pressure on crude prices. “So far, [OPEC+ cuts] did not lead to a sharp decline in global supply. That could be about to change,” the IEA said. “Supply is expected to move to a lower trajectory in the coming months as Riyadh [Saudi Arabia] implements more pronounced cuts.
As the price of Brent increased, the discount of Russian Urals to Brent decreased. This is not a positive trend for Western policy: the whole point of Western sanctions is to force Russian exports to sell at a steep discount, thereby reducing Kremlin revenue.
The narrowing of the Urals-Brent spread is an example of the general market trend towards a lower discount for medium-sour crudes relative to light sweet crudes. (“Medium” and “light” refer to the gravity of the crude; “sweet” and “sour” refer to the sulfur content.) The price of medium-sour crude is rising more than the price of light-sweet oil. The Russian Urals are moderately sour. Brent is sweet-light.
David Fyfe, chief economist at Argus, told FreightWaves: “We have real physical tension in medium-sour crude, in part because of the diversion of long-haul Russian crude to Asia. More crude on the water equals a tighter rapid supply.
“And in addition to Saudi and Russian supply restrictions in July and August, we halted Canadian crude production and several months of closure of Iraqi exports from Kirkuk. As a result, medium to heavy sour crude prices appreciated by compared to slightly soft references.”
According to data from Argus, Russia’s Urals discount to Brent rose from next to nothing to around $40 a barrel in the days following the invasion of Ukraine. After plummeting in mid-2022, the discount hit $40 a barrel again in January following the EU’s ban on Russian crude imports and G-7 price caps. Since then, the discount has been halved, to $20 a barrel.
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