Sanctions on Russian crude and diesel exports are failing

Price caps have been breached, discounts on Russian exports are dwindling, and more money is flowing to Russian coffers.

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Mainstream European tanker owners have largely abandoned the Russian trade now that the country’s crude and diesel have breached Western price caps. The so-called “shadow” fleet — tankers operating outside Western insurance and financial circles — has taken over.

Western sanctions had two goals: First, keep Russian oil flowing, and second, curb oil revenues to Putin’s military. Goal No. 2 is in major trouble. Russia’s export revenues are increasing as the price of its crude and products rises and volumes remain strong despite the exit of European tanker owners.

‘Smashing’ price cap levels

Russian Urals crude loading in the Black Sea port of Novorossiysk was at $73.57 per barrel on Friday, according to data from price-reporting agency Argus. That’s up 49% over the past two months to the highest levels since early November, prior to the EU ban on Russian crude imports. Urals crude has been above the $60-per-barrel price cap since mid-July.

Urals crude was at a discount of just $14.80 per barrel to Brent crude on Friday — the lowest spread since the invasion of Ukraine. The discount was near $40 per barrel at the beginning of this year.

Prices are likewise rising for Russia’s refined products. Russian diesel loaded in the Black Sea hit $108.98 per barrel on Wednesday and was still above $107 on Friday, up over 50% since early May. Russia’s Black Sea-origin diesel has been over the $100-per-barrel price cap since July 27, according to data from Argus.

The escalating value of Russia’s fuel exports is “smashing” price cap levels, said the International Energy Agency (IEA) on Friday. Russia’s oil and products export revenues in July were the highest since November, the IEA said.

And Russia looks set to earn even more this month. Reuters reported Tuesday that Russia’s diesel and gasoil exports rose 7% in the first half of August versus the first half of July.

Effect on non-Russian tanker trades

Mainstream tanker owners are seeing two counterbalancing effects from the price-cap breach.

On one hand, European tankers exiting the Russian trade are adding to capacity in non-Russian trades, pressuring rates in those markets.

Kevin Mackay, CEO of Teekay Tankers (NYSE: TNK), said during the company’s latest quarterly call: “We have seen an increase in the tonnage list as the number of players who did participate [in the Russian trade] are now returning to our trade, which is putting some pressure on spot rates.”

On the other hand, some buyers who previously purchased Russian exports appear to be shifting back to traditional sources, reportedly due to behind-the-scenes pressure from the U.S. government. According to Reuters, the Biden administration is using “soft” tactics, reaching out to market participants and urging them to abide by the price cap.

Brian Gallagher, head of investor relations at crude-tanker owner Euronav (NYSE: EURN), said during the company’s latest quarterly call: “There have been some buyers in the ‘dark trade’ who’ve been warned off … so, they’re buying barrels from more conventional sources that are being shipped by commercial players like us.”

More freight revenues could flow to Russia

Tankers carrying Russian cargoes earn a significant premium versus vessels carrying non-Russian cargoes on comparable routes.

When Russia’s crude and products were below the price cap, these excess earnings largely went to European tanker owners, primarily private Greek owners.

Now the excess will overwhelmingly go to shadow tanker owners, including Russia-linked owners, with some of those earnings believed to be funneled back to the Russian government.

This “backdoor” revenue stream to Russia was in place even before price caps were breached. A Financial Times analysis published Monday estimated that overcharging of freight fees and freight earned by Russian-linked vessels totaled $1.2 billion in April-June in the Baltic Sea-to-India trade.

Premium for Russian cargoes hits record high

Argus tracks the premium for Russian versus non-Russian cargoes. This data shows that the premium has skyrocketed in recent weeks as European tankers switched to non-Russian trades.

According to John Ollett, deputy head of European freight pricing at Argus, “The sanctions premium for Russian-origin crude soared … as European and G-7 [Group of Seven nations] tanker owners have largely abandoned the market.”

The sanctions premium is now the highest since Argus began assessing the differentials in March.

Argus calculated that a Suezmax tanker carrying 140,000 tons of crude from Novorossiysk to the west coast of India earned 150% more than a comparable tanker on a non-Russian trade during the first two weeks of August.

a chart showing premium for loading Russian tanker cargoes
(Chart: FreightWaves based on data from Argus)

High premiums are also being earned for tankers carrying Russian diesel and other refined products.

According to Argus’ data, a medium-range product tanker carrying 37,000 tons of Russian refined products from the Baltic Sea to West Africa earned 58% more in freight than a product tanker carrying the same volume from Northwest Europe to West Africa in the week ending Friday. The Russian premium for cargoes to Brazil was 48%.

Tanker safety risks rise

Meanwhile, tanker safety concerns have risen in the Black Sea following the Ukrainian drone attacks on a Russian naval vessel in Novorossiysk on Aug. 4 and a Russian tanker in the Kerch Strait on Aug. 5; the Ukrainian declaration that Russia’s Black Sea ports, including Novorossiysk, are “war risk areas”; and an incident Sunday in which the Russian military fired warning shots and boarded a dry bulk vessel bound for Ukraine.

The heightened risk has yet to significantly affect freight rates, but it could in the future.

“Following recent drone attacks on Russian vessels, the insurance costs for war risk premiums are likely to rise,” said Ollett. With both refined products and crude exceeding the price cap and regional safety risks escalating, “mainstream shipowners are increasingly abandoning the market.”

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