Above the Cap
With international oil prices climbing above the $80/bbl mark recently, so have the prices for Russian oil, with many indicators suggesting that levels are now above the price cap. According to Reuters calculations, Urals prices for Primorsk and Novorossiysk loadings have traded consistently above $60/bbl over the past two weeks, with the premium currently as high as $5.54/bbl. The picture is similar for clean and dirty products, with calculated prices also above the relevant price caps.
Still, there appears to be little interest among the EU member states to review the price ceiling on Russian crude, despite the initial agreement to review the ceiling every two months. However, the US administration is reportedly expected to increase monitoring of western trading houses, shippers and insurers in a move aimed at enforcement of the price cap, although the initial approach is likely to be soft rather than a forceful clampdown, which is feared to lead to add further upward pressure on oil prices. "The initial inclination on the part of Treasury is to be soft on it, not to come down like a hammer on tankers and tanker owners, to enforce, but enforce quietly with letters, phone calls," a source familiar with the administration's views told Reuters.
Will these latest developments bring another change to the tanker market? Since crude and product price caps came into effect, between 40% to 55% of all tankers (depending on size group) that loaded Russia are owned by G7/EU companies or companies with very strong links to price cap coalition, although many tankers in this category did only one or two Russian voyages before returning back into the conventional trade. With Russian prices above $60/bbl, cautious shipowners with significant G7/EU links are likely to withdraw from considering a Russian voyage in their next immediate loading window and seek alternative employment elsewhere in the mainstream market. Anecdotal evidence suggests this is already happening, with positions lists in several load regions already featuring a higher than usual number of vessels with recent history of Russian trade, although the general decline in Russian flows due to higher refining runs, peak domestic demand during summer months and Russia’s pledge to cut its production by 0.5mbd in August also have had a role to play here.
Over the past 16 months Russia (or Russian interests) have augmented substantially its tanker capacity capable to trade outside the G7/oil price coalition framework, as clearly demonstrated by a colossal uplift in second hand asset prices. Yet, the country still needs Western tonnage to some extent. Between 15% to 35% of tankers (depending on the size group), that traded solely Russia since the introduction of relevant price caps up to early July, are owned by western companies. With this in mind, Urals is likely to face downward pressure if there is any shortage of tonnage willing to trade/load Russia above price cap level but at present this depends on availability of non G7/EU tankers for the next fixing/loading window and ability of western shippers to receive attestation that purchased barrels are at or below the price cap.
In the longer run, if Russian crude and products are indeed forced to price back into the market, second hand prices of 10 and 15 year old tankers could resume facing upward pressure, until Russia has enough tonnage outside Western framework to meet its export needs.
Data source: Gibson Shipbrokers