By Mary Melton
Lack of buyers, lack of tankers
Russian liftings of crude oil have fallen by 40% since the US sanctions on Rosneft and Lukoil were announced, even though the sanctions don’t come into force until the end of this week. This is because buyers are either avoiding Russian oil or waiting for heavier price discounts.
Despite the loss of exports, Russian demand for tankers is up by 6% today compared to the period immediately prior to the sanctions. Higher Russian crude exports in September and October have pushed Russian crude on the water to a 2.5 year high. Also, Russian cargoes in floating storage nearly doubled last week according to Vortexa data, as tankers spent more time stationary at the end of their voyages due to buyer hesitation. This should continue to increase when US sanctions come into effect on Friday and finding buyers becomes increasingly difficult.
The loss of European-operated tankers able to move Russian oil either from a non-sanctioned producer or under the price cap means Russia now has access to fewer tankers, especially since mid-October, when Europe’s lower Urals price cap fully came into effect following a wind-down period.
Unless Russia shuts in oil production, which it wants to avoid at all costs, or buyers allow existing cargoes to discharge faster than they are loaded, Russia will need more tankers. These tankers are not going to come from the compliant fleet. Shadow owners will need to buy compliant ships for use in Russian oil trades and turn them dark.
We expect this will tighten supply in the compliant tanker fleet in coming weeks, even after Russia has optimised the use of its sanctioned fleet.
Russia’s oil revenue potential dwindles
Crude exports – albeit heavily discounted – are one of the few sources of oil revenue left for Russia amid a loss in refining capacity due to drone strikes on Russia’s refining infrastructure. Urals fob out of the Black Sea has fallen to a discount of over $25 to North Sea grades, the widest discount in 2.5 years according to Argus.
This is due to a lack of interest in cargoes from buyers. Most Indian refiners and the Chinese state-owned refiners are shunning cargoes for December and January delivery, and there are reports of unsold November-loading cargoes.
More shadow fleet tankers needed
Despite apparent difficulty in finding buyers, Russia’s biggest problem is an impending shortage of vessels to lift crude cargoes. High volumes currently in transit and in floating storage plus a supply chain due to get more inefficient will decrease availability.
Source: Vortexa
Additionally, Russia no longer has the luxury of using European-operated vessels, which were responsible for around 27% of Urals exports ytd before the sanctions on Rosneft/Lukoil. Sanctioned vessels willing to lift the cargoes are currently tied up with cargo onboard or are ballasting back to Russia from the East.
The number of vessels with a Russian crude cargo onboard has increased drastically amongst shadow fleet (non-European) vessels since last month’s sanctions. This inevitably means there are also fewer of these vessels ballasting back to Russia to load again and it will be difficult to keep up export levels.
Source: Vortexa
This combination of the loss of European-operated tonnage, very high levels of cargo onboard vessels, and increasing difficulty in placing barrels will very likely send Russian exporters to the S&P market, looking for tankers in the compliant fleet to enter the shadow fleet. Indeed, market chatter points to increased enquiries for second-hand tonnage.
Russia will optimise the existing shadow fleet
Before additional ships are found, we could also see Russia increase STS operations to streamline operations of the existing shadow fleet. We may start to see STS from Aframaxes/Suezmaxes to VLCCs in the Gulf of Oman, near the Suez Canal or in East Asia to minimise discharge time for Russia-origin vessels. We could also see STS in these locations from an OFAC-sanctioned tanker to a non-OFAC sanctioned tanker for a discharge in India or China. This has already been occurring since early 2024, but importers like the sanctioned Nayara or Yulong refineries could increase imports of Russian cargoes via STS. This gets around restrictions on port calls by OFAC-sanctioned vessels in India and Shandong.
Sanctions on virtually all Russian producers now supersede the price cap mechanism and mean there is a risk of sanctions on any vessel that lifts a Russian cargo. As a result, we expect to see increased use of tactics used by the Iran-trading dark fleet – dark STS, AIS spoofing, frequent name changes – in other words, inefficient supply chains. All these tactics keep vessels in inefficient employment and will increase Russia’s need for tonnage to keep export levels high.
Cuts in production unlikely even without buyers
We contend that Russia has an acute need for tankers because it will not countenance production cuts, even if buyers are hard to find. It is likely Russia will follow Iran’s example – keeping production as high as possible and exports high, even if that means steep discounts and cargoes idling at sea while buyers are found in Shandong.
If buyers cannot be found, a production cut would be a last resort and would be unlikely to happen quickly. Russian infrastructure can support storage, with recent readings of onshore crude storage capacity showing utilisation of just over 51% and stock draws in recent weeks thanks to high exports. Sustained and targeted Ukrainian attacks on Russian crude oil storage infrastructure could change this, but this would take time to emerge in exports.
Can buyers be tempted by ‘intermediaries’?
Some market commentators are pointing to India and China’s lack of interest in Russian crude since the Rosneft/Lukoil sanctions as a tactic to negotiate deeper discounts, and that cargoes will ultimately be bought through “intermediaries”.
The IEA has reported that a few new Russian export companies have emerged to sell Russian cargoes since May. These new entities were responsible for a record-high volume of 1 m b/d of Russian crude exports in October. These new entities plus Rosneft marketed and sold volumes produced by some previously sanctioned producers like Gazpromneft and Surgutneftegas.
These companies plus new ones yet to emerge may attempt to sell Russian cargoes instead of the newly sanctioned producers. Ultimately, this oil still comes from sanctioned producers, and the viability of this pathway depends on OFAC’s appetite for enforcement of secondary sanctions on buyers of this oil. If India does import these volumes through intermediaries, shadow tanker demand will still increase due to the loss of the European-linked vessels.
However, it is not a given that Indian buyers would be willing to deal with these new intermediaries. On Sunday, Trump said he would be willing to back a Senate bill that would sanction any buyer of Russian energy which isn’t implicitly supporting Ukraine. The penalty could be a 500% tariff on importing countries (India and China).
The bill, which has bipartisan support, has languished in Congress since April this year. Sunday’s comments are Trump’s mostly directly supportive yet and show his willingness to target the buyers of Russian oil. If this bill passes, we think it unlikely that India would continue to import Russian oil, even through newly-formed intermediaries. Russia would then be forced to discount its crude to the point where it could outcompete Iranian and Venezuelan volumes for Shandong teapot refiners.
Pending import quota availability, Shandong is still likely to import Russian volumes, given its location outside the US financial system and given the lever China could pull to curb rare Earths minerals or institute a reciprocal tariff in the case of a 500% tariff. This may mean China may be subject to less scrutiny/enforcement from the US than India, but the supply chain from Russia to Shandong would mirror the inefficiency of the Iran cargo trade.
Overall, Russia’s shadow fleet demand will only increase with an increasingly inefficient supply chain plus Russia’s need to keep exports high. Additions to the shadow fleet will tighten the compliant fleet.