Oil in troubled times

The EU ban on maritime imports of Russian refined petroleum products came into effect on 5 February just as we went to press. The ban comes on top of a European boycott of all Russian seaborne crude oil on 5 December, accompanied by a G7 price cap of US$60/barrel on Russian oil.

Will the restrictions significantly reduce Russia’s cash flow as intended in retaliation for its invasion of Ukraine on 24 February? Or will it be Europe that takes the hit, having imported 25% of its oil needs from Russia, pre-war? And how will that affect freight rates for our market?

While Russia will not find it easy to re-route the 1.2M barrels/day (b/d) of oil cut off from the European market, its oil exports have remained around the 2021 average as China and India have so far absorbed most of this volume, according to BloombergNEF. Worldwide oil demand stands at about 100M b/d and EU demand – at some 15M b/d – remains extremely robust. In the short term for Europe, the USA and Norway are the most likely nations to fill the gap left by Russian oil, as well as potentially Latin America and Middle East producers. However, it’s worth noting that there are still no EU restrictions on liquefied natural gas (LNG) imports from Russia and there are ways for Russia to circumvent the crude oil price cap (by using tankers not owned or insured in the EU, the UK, G7 countries and Australia) as well as the petroleum sanctions (via re-routing Russian oil through third party countries). All this uncertainty could spell higher transport costs or higher crude oil prices.

Shipping fuel prices, meanwhile, have fallen since the record highs reached following Russia’s invasion of Ukraine. The average price for very low sulphur fuel oil (VLSFO) –the fuel used by most commercial vessels – on 2 December was US$685.5/tonne, a 39% drop from the high on 14 June, according to a report by Ship&Bunker. The average price for high sulphur fuel oil (HSFO) – the fuel burned by ships using exhaust gas scrubbers – was US$457/tonne, a 32% reduction from the 5 May rate.

Freight rates for both oilseeds and vegetable oils have also been on a downward trend.

The dry bulk and container markets witnessed a significant downward correction last year, and the easing of port congestion caused by COVID supply chain disruptions –particularly in China – could see freight and charter costs slump for grains and oilseeds.

In addition, “every conceivable edible oil trade route without exception has been on a downward trend since the start of the year,” Riverside Tanker Chartering wrote in its February report. Tropical oil freight rates, which defied gravity for most of 2022, are now lower and are finally starting to correlate with fuel prices again, the UK vegetable oil shipbroker says.

Meanwhile, inspection and wait times for vessels using the Black Sea grain export corridor remain long (see p4) with the current agreement due to expire on 18 March.

“We would expect to see some hesitance, once again, among charterers to fix forward in absence of a firm extension to this agreement being agreed,” Riverside adds.

The cancellation of war risk insurance from 1 January by a large group of reinsurers has also added to the uncertainty of shipments from Ukraine’s deep sea ports for owners and charterers.

All these factors mean there is little oil to pour on the troubled waters of Ukraine.

Serena Lim, serenalim@quartzltd.com

RUSSIA: Poor weather conditions led to delays in grain and oilseed harvesting, according to the country’s agriculture ministry, reported by AgriCensus.

Some regions were hit by delays due to rainfall, while other areas had been affected by rain, snow or ice at the time of the 21 December report.

However, forecasts for the gross sunflower harvest remained above the previous year’s level, with a bigger harvest expected.

“Everyone hoped for 16.517M tonnes – there were higher estimates but most likely it will be 16M tonnes,” Russian Grain Union vice president Alexander Korbut was quoted as saying.

In some regions seed germination and high humidity had been recorded, the report said, with the former leading to a loss of quality and a decrease in oil content, which would lead to a reduced crop volume.

UKRAINE: The Ukrainian grain traders’ union (UGA) has asked the government to give priority supplies of electricity to grain silos to prevent damage to harvests, Reuters wrote on 13 December.

With about 10M tonnes of grain storage capacity lost due to the ongoing conflict with Russia, production processing at storage facilities had become almost impossible due to Russia’s targeting of the country's energy infrastructure with missile and drone strikes since October, the UGA was quoted as saying.

Power cuts were making it impossible to cool or ventilate grain at some sites, leading to grain spoilage and loss of funds, the UGA said.

The government said the 2022 grain crop could fall to around 51M tonnes from a record 86M tonnes in 2021 Reuters wrote.