The Energy Market’s Next Crisis: Oil Tanker Shortages
As the EU ban on Russian oil and fuels looms, demand for tankers – particularly ice tankers – has been climbing.
In early August, the average profit for an oil product tanker jumped to the highest level since 1997, and it is likely that profits have increased since then.
Fuel markets worldwide are also tight which, combined with soaring tanker prices, will only add to inflation fears.
In the new era of energy shortages, one aspect of the situation has tended to get overlooked: the transport of energy.
Demand for tankers has been on the rise since the European Union slapped sanctions on Russia in the spring, and this trend is only going to intensify in the coming months as the EU embargo on Russian oil and fuels enters into effect.
Bloomberg reported this week that shipping companies were scrambling to get their hands on as many ice-class tankers as they could ahead of the embargo, which comes into effect in early December for crude oil and two months later for fuels.
The vessels will be necessary to continue moving Russian oil and fuels in non-European directions, the report noted, as the EU would no longer be able to buy them, even though European buyers are currently stocking up on Russian oil and fuels in anticipation of the embargo.
The war in Ukraine and the EU’s response to it have already livened up the global tanker market considerably – and with it, freight costs for hydrocarbons.
Since the February 24 invasion, demand for tankers has spiked and is likely to remain robust in the observable future, not least because supply is quite limited, Svelland Capital’s Tor Svelland told CNBC in August.
Few tankers have been built in the past few years, and since this is not something the industry can reverse overnight, supply will probably remain tight, pushing the cost of transporting oil and fuels higher.
Indeed, in early August, Bloomberg again reported that the global tanker market was seeing the strongest demand in more than two decades. Citing data from Clarkson Research Services, the report said the average profit for an oil product tanker in the two weeks to August 8 had jumped to $400,000 – the highest since 1997.
By now, this figure is likely even higher, and it will continue up as demand for fuels outpaces supply in the coming months. The fuel market is already tight, but with the entry into effect of the EU fuel embargo against Russia, it is only going to become tighter, further intensifying competition for a limited fleet of fuel tankers.
“The EU ban on Russian oil products from February 2023 will spark a recalibration of the oil trade ecosystem,” Danish shipping company Torm said in a statement quoted by Bloomberg.
“Some of this trade recalibration has already started.”
The recalibration will involve not only more tankers to carry Russian fuel and crude to non-European destinations but also more tankers to supply Europe with oil and fuel from non-Russian locations, including, very likely, places like China and India that process Russian crude into fuels they then export to, among others, Europe.
On top of this expected tightness of the tanker market, which will have a palpable effect on fuel prices, the global fuel market is also tight and likely to remain so in the coming years.
According to a Reuters report citing S&P research, the reason is a record slump in global refining capacity, by 3.8 million barrels daily between March 2020 and July 2022, according to a Reuters report citing S&P research.
While refining capacity shrunk, fuel demand increased by 5.6 million bpd, creating a sizeable gap with supply based on refining capacity. New refining capacity of some 2 million bpd should come on stream by the end of next year unless delays occur, which is quite likely, according to the S&P research.
Further capacity increases are much less likely as refiners are suspicious that the energy transition push will turn potential new refineries into stranded assets before too long.
In this situation, the future does not look good for fuel affordability or wide availability. As the EU oil and fuel embargo enters into effect, Russia will turn to new clients in Asia, Africa, and, according to Bloomberg, Latin America. The EU itself will need to source its fuels from places like the Middle East, the U.S., and, as noted, India and China.
Because of the tight supply situation, which would certainly add a premium to fuel prices, it is not inconceivable that countries importing fuels from Russia, such as the two Asian giants and Saudi Arabia, could choose to do what China does with Russian LNG: resell it to Europe at a premium.
Meanwhile, the U.S. is experiencing its own constraints with fuel inventories, notably middle distillate inventories, diesel and jet fuel. What this means for Europe is that the help it can expect from the U.S. in the form of higher fuel exports would be limited: there is simply not enough diesel fuel to export. This could add a further premium to fuel prices this winter.
Tankers and fuels between them are about to make fuel costlier this winter as the world tries to fight inflation. Tankers and fuels won’t help that fight.
Thu, 09/15/2022 – 06:55