Lower oil prices could open the door for Western countries to tighten sanctions on Russian and Iranian exports.
Israel’s strike on Iran at the weekend, which avoided the country’s oil facilities, has reduced oil’s war premium. The Brent December contract fell by $4.52/bl or 5.9% to $71.39/bl in early trading today before recovering slightly to $72.07/bl at 16.53 GMT.
In the absence of supply restrictions elsewhere, Saudi Arabia and the UAE’s likely unwinding of voluntary production cuts from the end of this year should accelerate the downward trend. But in the absence of oil demand growth, we believe the West is likely to make room for these exports with creative new sanctions and stricter enforcement of existing sanctions, particularly on Russia and Iran. This should, on balance, help compliant VLCCs as trade shifts from the dark fleet to compliant fleet. Meanwhile lower oil prices could increase participation of the compliant tanker fleet in the Russian oil trade.
Lower oil prices should support tanker rates as participation of the compliant tanker fleet in the Russian oil trade increases but compliant VLCCs could be disadvantaged as more of China’s imports shift from the compliant fleet to the dark fleet.
On Saturday, G7 finance ministers promised to intensify their efforts in tackling Russia’s dark fleet and said they remain committed to taking further initiatives in response to oil price cap violations. Almost 160 oil tankers have been sanctioned in 2024 so far, compared to fewer than 30 in 2021, 2022 and 2023 together.
Already this month, the United States has expanded its sanctions on Iran’s oil sector, in response to Iran’s 1 October attack on Israel. The US Treasury added 17 tankers to its sanctions list which it says are part of “a network of illicit shipping facilitators in multiple jurisdictions which, through obfuscation and deception, load and transport Iranian oil for sale to buyers in Asia.” The UK sanctioned 18 tankers this month over involvement in Russian energy exports.
Although enforcement of sanctions has until now been sporadic at best, tankers that have been targeted by sanctions offices are proving to be less productive. The 2008-built Aframax vessel Ocean Amz, for example, spent months idling off Russia’s Baltic coast after it was sanctioned in June. But there are limits to the effectiveness of sanctions. After a change of name, technical manager, and registered owner in September, the Ocean Amz began trading again this month. This week it sailed via the English Channel with a cargo of Russian Urals crude oil just days after the UK said it plans to “challenge shadow fleet vessels with suspected dubious insurance to provide details of their insurance status as they pass through the English Channel.”
US sanctions appear to have been more effective than UK and EU action. Around 60% of tankers sanctioned by the UK for their involvement in transporting Russian oil this year have recently been active, oil analytics firm Vortexa says, compared to only around 20% of tankers sanctioned by the US. One reason for this is that ports and buyers in India, a major importer of Russian oil, appear to be increasingly wary of falling foul of US sanctions. The impact on the Iranian market has been more muted as 70% of sanctioned tankers remain active.
Other approaches that have been proposed, beyond merely designating tankers – such as challenging shadow tankers on their insurance at chokepoints like the English Channel and Danish Straits – may provide a better way to squeeze underinsured and aging tankers which pose safety and environmental risks out of the trade. But they will be hard to implement and administer.
Price cap compliant owners have generally been pushed out of the trade in Russian crude oil as Russian prices have exceeded the $60/bl price cap, but the remain a prominent force in transporting refined product cargoes where prices have generally been below the caps. Lower oil prices could draw more mainstream owners into both trades. Additionally, a recovery in Russian diesel exports this winter will likely lift Russian demand for MRs – the main vessel class transporting Russian products. This should pull them out of cross-European and transatlantic trades toward ‘premium business,’ if prices remain below the cap, laying the foundations for a rise in rates on non-Russian MR routes in Europe.
In contrast to India, China has been willing to find ways around sanctions as the main importer of Iranian barrels. Iranian crude oil exports increased by around half from 828k b/d in 2022 to 1.22m b/d in 2023 and have kept pace so far this year, with many sanctioned tankers trading well-beyond their typical retirement dates. A weakening economy and thin refining margins are likely to incentivise China’s private-sector refiners to replace more expensive grades with attractively priced Iranian oil.
Lower oil prices could, however, give sanctions enforcers the opportunity to enforce existing sanctions more strictly and to find new ways of tackling the fleet carrying Iranian oil as high-profile accidents such as the Pablo and the Ceres I have highlighted the environmental and safety risks of these tankers. Tighter sanctions and greater difficulties involved in trading them should force some of the older ships out of the sanctioned fleet and limit the attractiveness of Iranian exports, necessitating replacement barrels on compliant tankers.