Last week we titled our report “White House in the Spotlight… Again” and we could just as well use the same headline again this week, with the tanker market outlook very much influenced by decisions made in the US and Moscow. This week, Trump announced that he and President Putin had spoken at length, the first confirmed direct contact between a Russian and US president since 2022. The agenda was of course focused on ending the war in Ukraine. For the first time since the conflict began, it appears there will now be a push for peace. How long this might take, and what that might look like remains unclear, but given how impactful the war has been for the tanker market, it is arguably the most critical factor impacting the medium-term outlook.
Historical demand impact
Tanker tonne miles (crude/DPP/CPP) grew 5.5% in 2022 following the invasion and by 7.3% in 2023 after the implementation of the European/US embargo on Russian oil and oil price cap framework. Whilst not all of this growth was attributable to the war, the majority was, particularly in 2023.
European reaction
It remains heavily debated whether or not trade flows might return to “normal” in the event of a peace deal. The current leaders of the UK, France, and Germany, as well as the Baltic and other EU States might try particularly hard to prevent a swing back to Russian energy trade, especially in the event of a “bad deal” for Ukraine. Yet with the US defense secretary effectively ruling out Russia giving up all its territorial gains, as well as Ukraine joining NATO, concessions appear to already be on the table.
If it is assumed that any deal is likely to involve sanctions relief, then some normalization in trade flows are possible. The key, however, would be whether or not European refiners are allowed to return to Russian crude supplies. If this were to be the case, then over time trade flows might shift to resemble something similar (but not the same) as their prewar patterns. This year European refining throughput will be 500kbd lower than in 2022, whilst closures in Germany are likely to offer reduced scope for Russian pipeline flows to return to previous levels. Equally, other producers (notably the US) have captured market share in Europe and will need to be displaced.
For the products market, the impact could be arguably more significant than for the crude sector. CPP tanker tonne miles surged as Europe scrambled to replace Russian supplies in 2023 with cargoes from the Middle East, India, Far East and United States. At the same time, Russian cargoes which typically traded into Europe were pushed to new markets in Latin America, Africa and Asia creating substantial inefficiencies to the benefit of tanker owners and traders. Refining margins in Europe (and worldwide) also benefitted initially and would likely come under pressure if Russian supplies return to Europe. As a result, not only could we see lower domestic refining activity in Europe, but also lower long haul imports. Refiners in the US, who have lost some market share into the Americas might gain that back, but the overall impact would still be significantly lower tonne miles.
More competition in the crude market for Indian and Chinese refiners?
If sanctions are lifted, Indian and Chinese crude buyers will see more competition for Russian oil and, depending on willingness from Europe to resume Russian imports, could be incentivized to increase intake from elsewhere (likely West Africa, the Americas and Middle East) depending on prices and refining margins for specific grades.
Impact on tanker sizes
For crude tankers Aframaxes, followed by Suezmaxes were the greatest beneficiaries of the conflict, whilst VLCCs lost market share. As major VLCC destinations, India and China might have preferred to continue to use larger tankers, but given Russian port restrictions, were required to switch to Aframax and Suezmax tonnage. Thus, any increase in Indian or Chinese buying from outside Russia, is likely to benefit VLCCs more than other sizes, given the cargoes are likely to originate in West Africa, the Americas or the Middle East – key VLCC markets.
For clean tankers, LR2s and MRs saw the strongest gains in tonne miles as the refined products price cap came into effect. MRs may see less downside from reverting trade flows, given they could be redeployed on Russian exports to Europe, whilst MRs in the US Gulf would also gain back some market share in Latin America. However, for LR2s it is difficult to find a positive outlook. Europe’s imports from East of Suez would also decline, with LR2s feeling the brunt of this.
Impact on the dark fleet
However, a return to a “new normal” is not entirely negative. Since 2022, the dark/grey/illicit fleet has grown to over 1100 ships, more than 40% of which are now sanctioned. More than 90% are over 15 years of age and critically, more than 60% are over 20 years old. It’s important to note that many of these are engaged in Iranian or Venezuelan trade, so will not be impacted by a potential lifting of Russian sanctions but clearly it indicates that it will be very difficult for the >20 year old ships in particular, to continue trading. The hedge therefore for mainstream shipowners, is that whilst they may see tonne mile demand fall, any mainstream player returning to Russian trade is unlikely to use >20 year old tonnage with a checkered trading history.
In the Handy sector, where the fleet has rapidly aged, any increase in demand for sub 20 year old ships might prove problematic given many were sold off to serve trade outside the oil price cap framework. As such MRs may pick up extra demand here.
Ice class ships
Likewise, for both crude and clean tankers, the availability of ice class tonnage could prove problematic given the lack of investment, ageing of the fleet and trading history of these ships in recent years.
Asset prices and second hand market
The sale and purchase market could also be heavily impacted. Asset prices for newbuild and secondhand ships surged following the invasion. 15 year old prices for Suezmaxes are up 114% compared to February 2022, whilst Aframaxes gained 94%. VLCCs were up “just” 54% over the period, clearly demonstrating the preference for smaller crude carriers. If sanctions against Russia are lifted, demand for older ships is likely to come under pressure, perhaps bringing prices close enough to scrap levels. With a 20 year Aframax currently valued around $25m, compared to $8m for scrap, demolition activity is limited. However, the lifting of sanctions could significantly narrow the gap over time, making large scale scrapping a real possibility. Scrap prices are currently the lowest since 2021, but could come under pressure if an increase in scrapping is not met but an increase in demand for scrap steel.
Conclusion
Whilst negotiations appear to now be somewhat inevitable, a successful conclusion acceptable to the US, Russia, Ukraine and the Europeans is some way off. It is impossible at this stage to determine what the final settlement might look like, and most importantly, what Europe’s policy towards Russia and its energy exports might be. But, for the first time since the War began, it feels like we may be at the beginning of the end of the conflict, with fundamental changes in tanker trade an inevitable consequence.
Data source: Gibson Shipbrokers