The Putin regime has been enriching itself through oil exports ever since Russia invaded Ukraine. It still is. Russian oil sales continue to boom as of late October.

Russian seaborne crude exports are averaging 3.4 million barrels a day this month, up 2.5% year on year, according to data from Kpler. In the eight months since the invasion, Russia’s average crude exports jumped 12% compared to the eight months prior to the invasion.

The good news for those seeking to punish Russian President Vladimir Putin is that Russia’s oil gains face a serious threat in the very near future from a lack of available tankers.

The bad news is that time is running out — it may have already run out — for the G7 price cap designed to keep Russia’s export volumes steady while simultaneously squeezing Russia’s profits.

“It seems that a meaningful reduction in Russian exports is in the cards, at least temporarily,” warned Erik Broekhuizen, head of research at brokerage and consultancy Poten & Partners, in his latest outlook.

Bruce Paulsen, a sanctions expert and partner at law firm Seward & Kissel, told American Shipper: “For the most part, shipments of oil and petroleum products are not arranged at the last minute. If guidance on [price cap] compliance doesn’t come soon, some industry players may sit on the sidelines until they can determine that shipments under the price cap are safe.”

Sanctions effect imminent

The EU has reduced its reliance on seaborne crude imports from Russia since the war began. According to Kpler data, EU imports of Russian seaborne crude averaged 1.1 million barrels a day in the eight months since the war began, down 31% from the eight months before the war.

However, the EU was still importing an average of just over 1 million barrels per day of Russian seaborne crude this month, according to Kpler data. To comply with sanctions, volumes must fall to zero in just six weeks.

In June, the EU agreed to ban seaborne imports of Russian crude starting Dec. 5 and imports of seaborne products on Feb. 5. Crucially for tanker markets, these sanctions also stipulated that no EU shipping service provider could be involved in the transport of Russian oil cargoes to non-EU nations as of those dates.

The EU shipping services ban covers EU marine insurance and reinsurance providers. All-important U.K. marine insurance providers are heavily reliant on EU reinsurance. Whether directly or indirectly, insurers covering over 90% of the world’s tankers will be affected.

The far-reaching EU sanctions alarmed U.S. officials, who feared that a sudden drop in Russian exports due to a lack of tanker insurance would push up global oil prices, and thus domestic U.S. consumer prices — not a welcome political outcome. The G7 oil price cap plan was created to provide a relief valve and prevent that. If service providers in the G7 had documentation proving Russian oil was sold below a specified price cap, they would not face sanctions.

Still no EU price cap

But this won’t work unless the EU amends its own sanctions to include a price cap for Russian oil sold to non-EU nations, mirroring the G7 cap. 

Post-Brexit, the U.K. is in the G7 and not the EU, but even with the G7 decision, U.K. marine insurers won’t be in the clear unless their EU reinsurance is in the clear. Thus, the G7 plan to prevent broader oil market fallout — by allowing U.K. insurers to keep insuring Russian tanker cargoes — hinges on the EU following suit.

On Oct. 6, the EU adopted a new round of sanctions that established a legal basis for the cap. However, approval remains subject to a unanimous EU member vote, and some EU members oppose it. 

As of Tuesday, the EU had not voted to approve the cap. The G7 had not released any additional details on the price cap. The U.S. Office of Foreign Assets Control had released bare-bones preliminary guidance on Sept. 9 but no further details since. The latest guidance from the P&I (marine insurance) clubs was posted Oct. 12, stating that insurance for Russian cargoes transported to non-EU buyers after Dec. 5 won’t be allowed until the European Council votes to approve its own cap. 

‘Shadow fleet’ to Russia’s rescue?

If traditional tanker owners using Western insurance and doing U.S. dollar-denominated deals are effectively removed from the trade by sanctions uncertainty and the insurance issue, that leaves the so-called “shadow fleet.”

These are older tankers with opaque ownership that do not transact in dollars or use Western insurance. The shadow fleet has grown over recent years to carry sanctioned Iranian and Venezuelan oil to China. It is already moving Russian exports as well. The question is whether there’s enough shadow-fleet capacity to handle the full load.

An unnamed U.S. official told Reuters that Russia could access enough tankers to continue to ship 80%-90% of its oil despite sanctions. But there’s a very different message coming from some tanker brokerages and analysts. Several argue that there will simply not be enough replacement “shadow” or “dark” tonnage.

On Monday, brokerage Braemar reported that 33 tankers previously handling Iranian or Venezuelan exports have carried Russian exports since April, mostly to China and secondarily to India.

Braemar defined the dark fleet as tankers that have carried Iranian or Venezuelan crude at least once in the past year. It put the current total at 240 tankers, mostly smaller and midsized, with 74% 19 years or older. Eighty of those vessels are very large crude carriers (VLCCs, tankers that carry 2 million barrels) that won’t fit in Russian ports but could be used for ship-to-ship transfers for Russian cargoes.

If the entire dark fleet switched to Russian service and were as efficient as the “mainstream fleet,” it would be more than enough to keep Russian exports flowing, but “vessels engaged in illicit trading are highly inefficient,” Braemar emphasized.

Tankers in sanctioned trades sail at slow speed and spend large amounts of time on ballast (return) runs, in floating storage and conducting lengthy ship-to-ship transfers. In practice, would the entire fleet now carrying Iranian crude be able to carry Russian exports? “We think not,” asserted Braemar.

Ice-class tanker crunch

And then there’s the weather. 

Russia’s Black Sea tanker port, Novorossiysk, is usually ice-free year-round. Russia’s Baltic and Barents Sea tanker ports (Primorsk, Ust-Luga, Murmansk) are not. “Ice restrictions mean that ships calling at ports are required to be ice class, [with] specifically reinforced hulls capable of breaking through ice with or without icebreaker support,” explained brokerage BRS on Monday, warning of a looming “ice-class crunch.”

BRS said that Russia will be forced to rely more on its own ice-class fleet, comprising 34 Aframaxes (smaller tankers with capacity of 750,000 barrels) and four Suezmaxes (midsized tankers with capacity of 1 million barrels). That’s not a large enough fleet to handle Russia’s exports.

“It seems inevitable that Russia will be unable to maintain its crude exports at today’s levels in the event of a harsh winter,” said BRS.

How much Russian oil will China keep buying?

China has been a major buyer of Russian oil since the war began. Even if Russia can find enough tanker capacity to carry its exports after the EU sanctions deadline, it needs China to continue buying.

Price-reporting agency Argus said Tuesday that Chinese buyers now “appear to be giving Russian crude a wide berth in response to fears of western financial reprisal.”

It reported that “Russian crude would normally have begun trading to China for December delivery around mid-October” but no ESPO blend had been offered for December delivery yet. It noted that ESPO blend crude only takes five days’ sailing to get from Russia’s Kozmino port on the Pacific to north China, but it typically trades 50 days ahead of delivery. Russia’s Urals blend, “with a sailing time of some 40 days from the Black or Baltic seas, trades even further ahead of delivery,” noted Argus.

China state-owned company Sinopec has “largely stopped buying Russian crude” and ChinaOil and CNOOC have largely stopped trading Russian crude, according to Argus. It said that these Chinese companies “look unlikely to resume doing so without cast-iron assurances from Washington that they will not be penalized, no matter how many informal guarantees are proffered.”

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