Dearth of Clean Tankers After Russia Products Ban

The EU ban on imports of refined products from Russia that took effect on Sunday is set to further tighten an already stretched shipping market.

Shipbrokers say that despite the extraordinary sums paid recently for older vessels to carry Russian oil to non-European countries, and the creation of a sizable “shadow fleet” for product exports, this is unlikely to be sufficient. Russia's product exports will inevitably fall, they believe.

Shipments of "dirty" crude oil have been subject to an EU ban on imports of Russian crude and G7 restrictions on shipping services for third countries since Dec. 5. A price cap allows the latter to continue if crude deals are priced at $60/bbl or lower.

This has essentially divided the tanker market into two camps: one aligned with the EU ban and the price cap; and a separate shadow fleet that operates outside the cap and Western logistics.

A similar ban on shipping services and price cap came into force on Feb. 5 for Russia's exports of refined products.

A cap of $100/bbl was set for lighter, higher-value products such as diesel, and another was set at $45/bbl for heavier, lower-value products such as fuel oil.

So far, a non-Western fleet of about 350 dirty tankers — very large crude carriers (VLCCs), Suezmax and Aframax vessels — has enabled Russia to maintain its crude exports above 4 million b/d, Energy Intelligence data show.

But unlike crude, there is insufficient clean shadow tonnage to allow Russian products to find a similar escape route.

"Although there are 292 clean shadow tankers, the majority of these are small and unsuitable for long-distance voyages on the high seas," says Andrew Wilson, head of research at BRS shipbrokers.

"We assess the capacity in terms of barrels at around 77 million barrels," he told Energy Intelligence.

That number accounts for only 13.5% of total shadow fleet tonnage (the sum of clean and dirty tonnage) because clean tankers are typically much smaller than tankers that carry crude and other dirty products.

Furthermore, that assessment of the capacity of the shadow fleet represents an upper limit, given that some of these tankers may actually be carrying dirty products.

Clean and Dirty: Not Interchangeable

Ships that are used to carry crude oil cannot easily be put to work to transport clean products.

"The longer the vessel has been loading crude, the more complicated it will be to clean so that it can load clean petroleum products," a shipbroker said.

Wilson said that such cleaning is "extremely expensive and since they have already carried crude and their tanks are uncoated, it may be impossible to clean these up."

Shipbrokers point out that newbuild VLCCs can be used to lift clean petroleum products before they lift their first cargo of crude, and that the same goes for vessels that have just come out of drydock. But these are typically scarce.

This explains why sky-high prices have been paid for aging clean tankers over the past few months, a trend that shipbrokers expect to continue.

Richard Matthews, head of research at Gibson shipbrokers, thinks that a large part of the shadow fleet is already in place, including vessels that will carry Russian products.

"We've seen a lot of older product carriers sold in the past 11 or so months (over 100 MRs [medium-range tankers] and Handies [Handysize tankers] more than 15 years old), many of which will emerge loading Russian barrels in the next few weeks," he said.

He added that Russia's state-controlled Sovcomflot also has 38 MRs, Handies or LRs (long-range tankers) that it will use for this trade.

Rates to Recover From Recent Fall

Despite the estimated shortage of shadow tonnage for clean products, freight rates have dropped from a two-year high seen at the start of December, partly because the market has plenty of tonnage that previously lifted Russian barrels.

The Baltic Clean Tanker Index has plunged by around 30% since Dec. 22, according to shipbroker Affinity.

But as more aging tonnage is purchased to carry Russian crude and products, this is likely to restrict the availability of tankers for non-sanctioned trades and push rates higher again in the coming months.

Other factors likely to drive the expected rise in freight rates include the emergence of European refineries from maintenance, an increase in diesel exports from the Middle East to Europe and a rise in China's exports of refined products, says Francesco Tassello, a senior analyst at Affinity.

Meanwhile, the additional demand for tanker capacity created by Russian barrels being pushed out of the European market is likely to boost demand for shadow-market vessels.

Since Feb. 1, Russia has banned the sale of crude and oil products to foreign companies that purchase oil in line with the price caps or linked to them indirectly.

This poses a conundrum.

Given the limited size of the shadow fleet, not all buyers of Russian products may be able to use those vessels to lift Russian products.

But Moscow's ban on transactions that are based on the price caps also means that any extra demand for tanker capacity may not benefit the Western tanker fleet either.

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