By Mary Melton
We’ve tackled the impact that the end of this brutal conflict could have on tanker markets. Now we turn our attention to the likely impact of what we hope will be the final wave of efforts by Trump and his allies to bring Putin to the negotiating table.
Fresh from his success in Gaza, Trump is now shifting his attention back to ending the Russia-Ukraine war. Trump and Zelensky meet tomorrow to discuss whether the US will provide Tomahawk missiles to enable Ukraine to strike deeper into Russia. Trump is increasing pressure on India and Europe to shut out Russian crude. In a press conference last night, Trump claimed that Modi has promised India will stop buying Russian oil - something that Trump’s ‘extra’ 25% tariff on Indian imports since August has seemingly failed to do. If true, the only remaining buyers of Russian crude would be China and Turkey. But both countries face intense pressure to remove Russian crude from their diets. Within a couple of months, the EU will face a ban on product imports refined from Russian crude. Product imports from India’s Vadinar refinery have been off limits to European buyers since EU sanctions on Nyara in mid-July. In early September Europe further restricted Russia’s access to European tankers by dropping the Urals price cap. Yesterday, the UK weighed in with sanctions on Rosneft and Lukoil, its own ban on product imports refined from Russian crude oil, and new sanctions on tankers.
These manoeuvres follow months of Ukrainian drone strikes on Russia’s refineries and oil terminals. Currently around a third (about 1.6 mbd) of refinery capacity is estimated to be offline due to a combination of routine maintenance (amid a shortage of spare parts) or attacks from Ukraine. Russia’s clean refined product exports hit multi-year lows in September, having fallen by around 20% (approx. 300k b/d) since June. Unable to refine much of its own crude oil, Russia has become increasingly reliant on its crude exports.
These new initiatives are further disrupting Russian oil flows and the tankers that move them.
Thanks to the lower Urals price cap, Greek-operated tankers, that had until September enjoyed triangulating price cap-compliant Russian cargoes in with other global trades – no longer have the option to lift Russian volumes. Russia is increasingly reliant on ‘grey tankers’ – as yet un-sanctioned vessels that are operated from outside G7 countries - and its fleet on sanctioned tankers.
This has displaced flexible tonnage, which could increase vessel availability in other markets outside of Russia. But the benefits gained in tonne-mile demand for compliant vessels if India takes more non-Russian crude, as well as Russian volumes going further to China and decreasing vessel availability could then incentivise more S&P, which would then also tighten the compliant fleet.
Impact of UK’s latest sanctions
The impact of the UK’s new sanctions on vessels is likely to be minimal. A UK designation alone has not historically altered vessels’ Russian trading patterns. These vessels have continued to call in both Indian and Chinese ports. However, the sanctions on Rosneft and Lukoil could be significant in that this could displace European product tankers that have been servicing Russian exports. Vessels wary of falling foul of UK sanctions – especially those operated by European-linked companies that use UK-based maritime services such as P&I insurance – will likely avoid lifting refined products linked to these companies - thus increasing the likelihood that Russian product exports will have to be facilitated more on the shadow fleet (grey or dark fleet tankers).
Impact of refinery strikes and new sanctions by commodity:
Crude
Months of drone strikes on refineries and a lack of ability to process its crude saw Russian crude exports in September hit a wartime high of 3.78 m b/d. Exports have fallen slightly in the first 2 weeks of October and are now around 3.42 m b/d, which is sitting closer to the wartime average of 3.34 m b/d. Russia’s crude export terminals were already nearing their maximum handling capacity, meaning last month’s volumes were likely a ceiling that will be difficult to surpass.
These high exports included a 2.5 year high in volumes of Russian Arctic, Black Sea and Baltic exports going further afield to China. This is slowing the pace of ballast vessels heading back to the Russia Baltic to load another cargo.
A Baltic-origin Urals laden voyage to China instead of West Coast India translates to a gain of around 70% in tonne-miles. The Russian-trading fleet is heading towards clear challenges with fleet availability. The lower Europe price cap has reduced Russia’s access to Greek-operated vessels (which this summer were responsible for 35% of all Urals liftings). Higher tonne-mile demand for longer voyages to China - due to India’s apparent commitment to stop buying Russian oil - could add to Russia’s demand for ageing vessels. This could benefit the compliant market as vessels exit compliant trade.
If we assume India is now committed to avoiding Russian volumes, around 83m tonnes/year of cargo would move on to compliant Suezmaxes and VLCCs to satisfy its appetite for crude. If India’s flows revert to pre-Covid arrangements (when demand can last be considered ‘normal’), around 63% of this replacement crude would have to come from the Middle East Gulf, and the remaining 37% from the Atlantic Basin. Production growth from the Atlantic Basin over the past few years, coupled with Europe’s flagging crude demand might draw in disproportionately higher imports from the Atlantic, however.
Diesel
Refinery outages and higher domestic consumption due to harvest season saw Russia’s diesel exports reach a one-year low in September. This has displaced vessels into the Med and NW Europe – markets that already face weaker demand from North America and West Africa (post-Dangote). The biggest loser has been Brazil, which has been forced to turn to higher-priced US diesel.
The UK’s sanctions on Rosneft and Lukoil have the potential to disrupt the Russian diesel trade further. It is difficult to estimate the volume of diesel exported by both companies due to Russia’s pipeline system and how terminals are shared amongst suppliers. However, these are Russia’s two largest oil producers.
If we assume that European-linked vessels will now avoid carrying cargoes from these producers due to the risk of UK sanctions, Russia will need to turn to the “grey” and dark fleet. In the last six months, on average 42% of all Russian diesel exports have been facilitated by Greek-operated vessels, as diesel has largely remained under the $100/bbl price cap (except for a short period in late summer/autumn 2023). While diesel exports have shrunk in recent months, compliant ships have grown as a share of all Russian diesel liftings.
The UK’s ban on imports of products refined from Russian crude oil, like the EU’s that is due to come into effect in January 2026 will be difficult complex to enforce and test. We assume that European and UK buyers will, however, err on the side of caution. The EU and UK’s imports of Turkish diesel is already minimal, having dropped recently from around 5% of all imports to 2.7% in September. However, volumes refined in India account for a slightly higher volume (on average 6% in 2025). Europe could rely more on Middle East Gulf-produced middle distillates, including jet fuel. Currently, jet arriving from India into EU and the UK accounts for on average 9% of imports.
MRs are likely to benefit from US Gulf liftings as Europe looks for other sources of diesel. TC14 has been the success story of the last few years. The loss of Russian diesel supply since Europe’s product ban in Feb 2023, successive periods of strong LR freight (due to Red Sea attacks) and a lack of demand for US barrels from Brazil (due to growth of Russian diesel imports) have pushed US barrels to Europe. If Europe decreases its exposure to any diesel that could have originated from Russian crude, we can expect to see higher demand for US diesel on MRs. Also supporting MRs, Brazil’s imports of US diesel have reached levels not seen since December 2022. Higher demand for US diesel from both Europe and Brazil should continue to keep demand for US Gulf MRs healthy and absorb some of the vessel supply overhang in Europe.
Parallel diesel supply chain emerging?
Not only have we already seen increased demand from Brazil for alternate cargoes, but before the European and UK bans on products refined from Russian crude were in effect, we were seeing early signs of a parallel supply chain emerging. Indian diesel is increasingly going to Brazil and Turkey. Brazil’s imports of Indian diesel reached a three-year high in September and have surpassed this level so far in October. Similarly, Turkey’s imports of Indian diesel in September reached levels last seen in 2022.
This points to a new supply chain emerging because Russian refined product exports are challenged. This means instead of relying as heavily on Russian diesel exports, these importers are still connected to the Russian supply chain – importing products likely derived from Russian feedstock, without importing the Russian refined product itself.
This inefficient supply chain, if it continues, should boost tonne-mile demand for LRs, which are facilitating most of these volumes thus far. Demand for these voyages could increase as European importers decrease exposure to volumes that could be refined from Russian feedstock.
Fuel Oil
Ukrainian strikes on secondary units at Russian refineries have led to higher fuel oil exports from Russia through August and September, reaching highs not seen since March 2023. Greek-operated vessels have facilitated 60% of these exports in the last three months. With UK sanctions now on Rosneft and Lukoil, we can assume these vessels will no longer transport fuel oil from these refiners, increasing demand for ‘grey’ ships.
Naphtha
Due to refinery challenges, Russia’s naphtha exports have reached multi-year lows. As only 15% of these flows are currently facilitated by Europe-linked tanker operators, the requirement for additional ‘grey’ tankers will be minimal.
Gasoline
Russian gasoline exports have already been significantly curtailed since this summer, when shortages on the domestic market resulted in exports bans that have been extended throughout the end of the year.