Ukraine is on a knife’s edge. Russian troops are amassed at its border. The U.S., EU and U.K. warn of severe consequences if Russia attacks, which the U.S. believes could happen at any moment. How could a Russian invasion impact ocean shipping?
Spiking fuel costs
The first potential consequence, which would affect all shipping segments, would be higher fuel costs. The price of marine bunker fuel follows the price of Brent crude.
“With the clear potential for an invasion of Ukraine, this would only further exacerbate any perceived squeeze on oil markets,” said Maritime Strategies International in its January tanker outlook, adding, “Such geopolitical volatility typically pushes up prices.”
If Russian exports are targeted by sanctions, the oil price effect could be extreme. “The major impact of any sanctions on Russia’s exports would be soaring crude prices, which could potentially exceed $100 per barrel,” wrote Alphatanker in a recent report. (Alphatanker was subsequently rebranded BRS Tanker.)
JP Morgan cautioned on Friday that oil prices could rise as high as $150 per barrel.
If there are sanctions, wrote Poten & Partners in a report on Friday, “Oil prices will skyrocket in the short term because Russia is such a big producer and the oil markets are already quite tight.”
Rising fuel prices are a negative for tanker and dry bulk spot rate indexes. For container lines, fuel is one of the largest costs but is ultimately passed along to cargo shippers via bunker adjustment factor surcharges.
The Ukraine crisis comes at a time when marine fuel costs are already historically high.
The Ship & Bunker price for 0.5% sulfur fuel known as very low sulfur fuel oil (VLSFO) hit an all-time peak of $694.50 per ton on Thursday. That was even higher than in January 2020 when the price of VLSFO was artificially inflated by the transition to low-sulfur fuel during implementation of the IMO 2020 fuel rule.
Prior to 2020, ships burned 3.5% sulfur fuel known as high sulfur fuel oil (HSFO). According to Ship & Bunker historical data, the last time HSFO was as expensive as VLSFO is today was in May 2012, almost a decade ago.
Product tanker effects
Sanctions targeting Russian energy exports are seen as unlikely, but even so, analysts are now going through “what if?” scenarios.
If sanctions target Russian exports, Poten said, “Europe will need to find alternative sources of crude oil and/or products. Although there may be a transition period, one would expect that European countries will boost product purchases to prevent shortfalls. This will provide a significant short-term boost to the trans-Atlantic product tanker markets.”
Poten hypothesized that “MRs in particular will benefit.” Medium-range (MR) vessels are smaller tankers with capacity of 25,000-54,999 deadweight tons (DWT) that handle regional and intrabasin cargoes.
“Additional supplies may be sourced from the Middle East and Asia, favoring LR1s [capacity: 55,000-79,999 DWT] and LR2s [80,000-199,999 DWT],” Poten added.
BRS agreed on the larger product tanker classes but disagreed on the MR outlook. BRS said, “Russia is a significant diesel exporter to Europe and if those flows were backed out, Europe would have to import from East of Suez refineries. This would see less diesel carried by MRs in and around Europe and more being carried on LRs moving east to west.”
Crude tanker effects
Poten put current Russian crude exports at 6.5 million barrels per day, with most of that moving by pipeline: the East Siberia Pacific Ocean pipeline to Chinese markets, and the Druzhba pipeline to Eastern Europe. Most Russian crude tanker cargoes are loaded in the Baltic Sea (to Northeast Europe) and the Black Sea (to Southern Europe).
In the case of an invasion of Ukraine and sanctions, “European refiners will need to turn to OPEC countries in the Middle East,” continued Poten. “This creates an interesting dilemma for OPEC: Are they willing to increase deliveries to Europe when one of their partners, Russia, is the target of sanctions?”
If so, Poten predicted that demand for very large crude carriers (VLCCs; tankers that carry 2 million barrels) would rise and demand for Aframaxes (750,000 barrels) and Suezmaxes (1 million barrels) “would suffer.” VLCCs carrying Middle East crude to Europe would supplant smaller tankers carrying such volumes from Russia.
BRS concurred. “Crude flows would shift as sour crude would become scarce, as most of Russia’s output, especially in western Siberia, is sour. This could see Middle Eastern producers attempt to plug the gap left by Russia and hike their exports. This would help lift large crude tanker hire rates in the Middle East versus elsewhere.
“On the other hand, it seems like that Aframax demand in the Baltic and Black Sea would be obliterated, which would likely lead to a ripple effect across other Aframax markets as units would swiftly ballast elsewhere in search of cargoes,” said BRS.
Some of those displaced tankers may not have to ballast (reposition) that far, according to Poten, which sees some of them serving Russian crude exports to Asia instead of Europe.
“Russia will have to look for alternative customers for its crude, some of whom will likely be in China. This will mean more long-haul trips from the Baltic and the Black Sea. Russia’s loading infrastructure does not support VLCCs, so Suezmaxes and to a lesser extent Aframaxes will be utilized, boosting ton-mile demand,” said Poten.
LNG shipping effects
Europe’s dependence on Russian natural gas is a key reason why sanctions against Russian exports are viewed as unlikely.
Around 35%-40% of Europe’s natural gas comes from Russia, including gas in pipelines through Ukraine. Germany obtains around 50% of its natural gas from Russia. The new Nord Stream 2 pipeline connecting Russia and Germany has yet to be certified; its future flows have become a bargaining chip in the Ukraine crisis.
Military action in the Ukraine would increase the European spot price for liquefied natural gas (LNG), drawing more U.S. export cargoes to Europe. Multiple media outlets have also reported that the U.S. is in talks with LNG exporter Qatar about shifting more supply to Europe in the case of a Russian invasion of Ukraine.
When Russia decreased pipeline flows to Europe in December, the European spot price for LNG jumped higher than the Asian LNG spot price, attracting U.S. export cargoes to Europe that would have otherwise gone to Asia — the same dynamic that would hypothetically occur if Ukraine were invaded.
When diversions happened last month, the shift toward European destinations shrank average voyage distance and thus demand for LNG spot carriers, and LNG spot shipping rates sank.
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