Weight of Freight: More change for Atlantic markets

Atlantic Suezmax and Aframax rates climbed from year-lows to year-highs in a matter of weeks at the end of October on the back of European demand and stretched tonnage supplies. In the background, shifting trade flows and a changing fleet are continuing to remake Atlantic freight markets following a year of change.

From February last year, the Russia-Ukraine conflict reshaped the global flow of oil and refined products.Rather than making the short trip to Europe, Russian oil from the Baltic and Black Seas now must travel between two and 10 times the distance to India and China. Similarly, Europe now imports crude from further afield with more coming from the US Gulf, west Africa, and Mideast Gulf on very large crude carriers (VLCCs) and Suezmaxes rather than the smaller Aframaxes that carried Russian oil to Europe.

Alongside the boost to rates and tonne-miles this provided, it also resulted in the “dark” fleet of tankers that were transporting sanctioned Venezuelan and Iranian oil swelling to meet the demand of Russia’s exports after Europe, the US and others imposed a price cap of $60/bl on Russian crude above which firms from countries enforcing this cap could no longer provide shipping or other services.

Generally, these vessels are older, possess no or dubious insurance cover, and have opaque ownership structures. Often, they use tactics to avoid detection such as turning off their satellite location signal or sending out a false signal. They pose a serious risk to all vessels as exemplified by the case of the 26-year-old Pablo, which caught fire after delivering a cargo of Iranian oil to China. Without insurance and with owners impossible to contact, the wreck floated in waters close to Malaysia for months. 

The US and EU have pledged to step up their enforcement of the cap, which could see some tankers move out of the Russian trade and into mainstream markets. The easing of sanctions on Venezuela is also likely to have this effect as well as moving some trade flows.

Venezuela returns

Washington’s decision to ease sanctions on Venezuela’s oil sector is likely to boost Atlantic tanker freight rates, with dirty Aframax and clean Medium Range (MR) owners poised to benefit the most, according to shipbroker analysts.

The sanctions relief may not result in a major boost in Venezuelan crude production and exports in the immediate term, given the country’s oil industry has suffered years of underinvestment. Expectations within state-owned PdV are that Venezuela will probably be able to raise output by around 200,000 b/d by the end of the year. The restrictions are also only being lifted for six months, at least initially. But tanker rates should still get support from a shift in trade flows and increased use of “mainstream” vessels.

The majority of Venezuela’s crude exports in 2021-22 were transported on board 2mn bl very large crude carriers (VLCCs), reflecting the long distance of voyages to China, Venezuela’s main crude buyer under US sanctions. But so far in 2023, the use of smaller Aframax tankers has grown with the resumption of Chevron exporting Venezuelan crude to the US. Before the sanctions waiver, Chevron wasgiven permission to ship output from its joint ventures with PdV to the US. With US east coast refineries optimised for sourer grades, the US is likely to remain one of the main consumers of Venezuelan oil.

“Considering our expectations of future shifts in Venezuelan crude flows and against a backdrop of higher Venezuelan crude production, it seems likely that regional Aframax demand will receive a boost, which could lift freight rates on routes such as from Covenas to the US Gulf coast,” Paris-based shipbroker BRS said.

This could mean China taking some of the Brazilian and Colombian crude that currently goes to the US, thereby increasing demand for long-haul VLCC voyages. On the flip side, demand for Suezmaxes, which haul around half of Colombian and Brazilian crude exports to the US Gulf coast, could take a minor hit, BRS added.

On the clean tanker side, demand for MR vessels to carry naphtha and other oil products to Venezuela will probably increase. Extra heavy oil production in the Orinoco belt, where much of Venezuela’s outputgrowth will come from, has to be upgraded and diluted before it can be shipped by pipeline to refineriesor export terminals. Previously Venezuela relied on Iranian condensate for upgrading its heavy crude.

“Even considering payment issues, we anticipate a rapid rise in clean product imports into Venezuela with these either being gasoline or naphtha to be used for diluent. As before the sanctions, we anticipate the US to be the main supplier of these products, and this should add to clean tanker demandin the western Atlantic,” BRS said.

The upside may be limited if any increase in US product exports to Venezuela leads to lower shipments from the US to elsewhere in Latin America or west Africa, especially if it results in a decrease in tonne-miles out of the US Gulf. Furthermore, if Venezuela can upgrade its refineries following the lifting of sanctions to bring throughput closer to nameplate capacity, it would constrain the country’s crude exports and cap demand for product imports. BRS considers this a “low probability scenario” though, as Venezuela was already a net importer of oil products before sanctions.

Out of the shadows

A significant consequence of the sanctions waiver is that Venezuela will no longer have to rely on “dark” or “shadow” fleet tankers for its crude exports or product imports, which are more costly and less reliable than the mainstream fleet. At least 169 tankers over 25,000 deadweight tonnes have been involved in Venezuelan oil trade since sanctions were enacted, comprising more than 50 VLCCs, 80 Suezmaxes and Aframaxes and more than 30 Long Range 1 (LR1), MR and Handysize vessels, according to shipbroker Gibson.

The US has explicitly banned individuals or entities based in Russia from getting involved in the shipping of Venezuelan oil, underlining Washington’s intention to move Caracas away from Moscow and Tehran, both of which have been actively involved in Venezuela’s oil sector since sanctions began and both of which also make use of a global dark fleet of tankers to transport their oil.

At the same time, some tankers, especially those with European or G7 owners, appear to be increasinglywary of lifting Russian crude after the US cracked down on two vessels on 12 October for breaching sanctions. Freight for 140,000t Russian crude shipments from the Black Sea port of Novorossiysk to the west coast of India jumped by $1.8mn to $6.5mn between 13 and 20 October, indicating tighter vessel supply and growing concern over sanctions risks.

“The longer sanctions [on Venezuela] remain off the table, the more vessels previously engaged in that trade will be marginalised and forced out of the market, shifting increased oil volumes for the dark fleet onto non-sanctioned tonnage,” Gibson said.

Dark fleet tankers pushed out of Venezuelan oil trade and European-linked vessels leaving Russian trade are likely to weigh on tanker rates globally, although higher Iranian crude exports may absorb a few of the former Venezuelan lifters. In the longer term, a new status quo where Venezuela can use the mainstream fleet and sanctions on Russia are more stringently enforced could see a boom in the scrapping of these older vessels, reducing tonnage at a time of record low additions to the global fleet.

Older but not wiser

The price of Russian Urals crude loaded in the Baltic and Black Seas on 12 July passed the $60/bl cap at which European vessels can, theoretically, no longer lift the cargoes. But since then, around 30pc of Urals loadings were by vessels owned or operated by companies based in the EU, according to Argus analysis.

But these are mostly vessels that can move back into mainstream trades in the North Sea, Mediterranean or elsewhere. The vessels left to transport Russian cargoes will be the ageing dark fleet. Many are in the hands of companies that own only one vessel — a fairly common practice in the industry — with the ultimate, beneficial owner of the tanker hidden behind various corporate layers.

Opaque ownership structures may make it easier for some shipowners to avoid liability for breaching sanctions. A high-value asset such as a ship within a corporate ownership structure offers the owner the benefits of privacy and the minimisation of liability exposure, as well as potential tax relief. The MarshallIslands and other tax havens are popular choices for the registration of vessel-owning companies.

Roughly 27pc of global Suezmax tonnage and 46pc of Aframax tonnage is over the age of 15, according to data from shipbroker BRS. But new additions to the fleet this year and next year are very limited.

A flurry of activity in second-hand tanker markets followed the start of the Russia-Ukraine conflict in February last year as older vessels were sold at record prices into the dark fleet. This has slowed somewhat. Prices for 15-year-old VLCCs are down by 7pc over six months but remain 10pc higher on theyear and over $20mn higher than their five-month average, according to data from Allied Shipbroking.

Prices for 15-year-old Suezmaxes are up by 36pc year on year and 15-year-old Aframaxes are up by 30pc. Second-hand prices for older Suezmax and Aframax vessels also dipped in early October but have since recovered on the back of higher freight rates. 

To Europe

Freight for 145,000t shipments of US crude WTI to Europe rose to $4.45/bl at the end of October, and freight for 130,000t shipments of Nigerian Bonny Light to Europe rose to $4.59/bl. Both were under $2/bl at the start of the month. Europe increased imports of both – but especially WTI – following the EU ban on imports of Russian crude.

Aframax and Suezmax utilisation in the west, as measured by the ratio of laden vessels over the total vessels available in the basin, has spiked from multi-year lows of 41.7pc and 34.9pc, respectively, in August, to 51.9pc and 42.8pc as of the last week of October, according to BRS. The rise in utilisation in the Atlantic has been sharper for Aframaxes, which have benefited from increased US crude exports intoEurope, as well as from more North Sea-Europe trades, the shipbroker added.

But while WTI and Bonny Light are both light sweet crudes, Russian Urals is a medium sour. As a result, European refiners slates have tilted lighter and there has been a marked shortage of sour supplies – exacerbated by the halt to exports of Iraqi Kirkuk from the Turkish Mediterranean port of Ceyhan and Saudi production cuts. This has helped to lift freight for 140,000t shipments – around 1mn bl – of Iraqi Basrah Medium crude to $2.62/bl at the start of November, up by $1/bl in a month, and continued Europe’s dependence on oil from further away than Russia.

Even with vessels returning to mainstream trades, lasting additions to tonne-mile demand and an ageing fleet – and the inefficiencies associated with both – are likely to be very supportive of crude freight rates.

Author Matthew Mitchell, Market Reporter - Freight