(Bloomberg) -- Russia appears to be on the cusp of a debilitating oil-freight transportation problem because of US sanctions, writes Bloomberg oil strategist Julian Lee.
On Jan. 10, the US Treasury sanctioned 161 oil tankers for their role in moving Russian oil. It was part of a raft of measures against Moscow imposed by the outgoing Biden administration that President Donald Trump has yet to dial down. Indeed, there appears to be a chance he’ll go even harder prior to any Ukraine peace talks.
The cost of finding a tanker to carry Russia’s flagship Urals oil to Asia has already jumped by almost 50% since the measures were introduced, according to data from Argus Media. The gap between prices when the barrels leave Russia and arrive in Asia, a proxy for delivery costs, have also soared.
READ: Russian Oil Falls Back Below $60 Price Cap as US Sanctions Bite
While such surges happened in the past, there was reason at the time to be wary of how real they were. For example, inflating delivery costs would have been a clever way of making it look like exported cargoes cost $60-a-barrel or less — even if the sale price upon delivery to Asia was higher.
Doing that would have qualified the cargoes for access to western services including tankers and insurance while still allowing barrels to ultimately be sold far above a Group of Seven price cap.
There’s no way to prove that that kind of overstating of freight rates did or didn’t happen. There was simply a financial incentive to do it. Likewise, there’s no way today to prove or disprove that the same thing isn’t happening. Indeed, the same incentive to game the numbers still exists.
What’s changed is the vast fleet of tankers now under sanction, and signs that freshly blacklisted ones are starting to get disrupted — just as those placed under prior measures also struggled for employment. It’s very possible that Russia’s true freight costs really are about to spiral.
There are now 265 tankers blacklisted by at least one of the US, EU or UK (with a US listing being by far the most disruptive to trading). Prior American measures by and large stopped the targeted vessels from trading.
The measures hit refined products carriers as well as those hauling crude.
Even so, out of 435 vessels that carried Russian crude in 2024, 112 of them, or 26%, are now subject to sanctions imposed by Washington. Add in the ones targeted by London and Brussels and the proportion rises to 37%.
But that understates the problem facing the Kremlin. With 80% doing repeat cargoes (and some as many as 20), the tankers sanctioned by the US hauled 45% of all seaborne Russian crude shipments last year. Add in the vessels hit by the UK and European Union, but not the US, and 57% of Moscow’s crude shipments were carried on vessels that are now blacklisted.
And even that might not be enough. Some tankers designated for moving Iranian oil — including two on Thursday — had also transported Russian barrels.
These kinds of numbers represent a gaping hole in the shadow fleet of tankers that Russia assembled to move its oil and they make it imperative to find alternative vessels.
To be clear, Russia has so far largely worked around prior sanctions and kept its vast export program steady. It is this huge volume of oil for which it needs to find tankers.
The net result is an increase in freight bills that may just be starting, especially if other owners — previously cold to the trade — need additional incentives to take the risk of falling foul of future sanctions. It’s also likely to make it more expensive to acquire the next batch of ships to supplement the shadow fleet and fill the hole created by the sanctions.
Indeed the idea of buying second hand ships to sort out the problem — is questionable. If you are an intermediary considering working with Russia, or even Russia itself, what’s the point of spending billions of dollars or dirhams on second-hand tankers, only to see them sanctioned?
When the ‘delivery spread’ and freight costs boomed previously, there was nothing close to the kind of restriction on tanker supply that Russia faces today.
Russia’s apparent spot-market freight bills are already punishing, at $10 a barrel from the Black Sea to India and as much as $13 from the Baltic, according to Argus.
That’s not yet at the level it reached in the weeks immediately after the introduction of the price cap — when the Baltic to India trip cost more than $20 a barrel — but it’s risen by $4.20 a barrel, or 48%, since Jan. 10.
Importantly, some sanctioned ships are already failing to deliver efficiently. Several of the blacklisted ones that remain in use are just sitting off the Russian coast, or outside the ports in China where they’re supposed to discharge, others are offloading into larger vessels near Russia for storage.
Some are en route to their destinations and it will be interesting to see what they do once they’ve delivered.
Sanctioned ships may provide a source of possible storage vessels, but the potential for future fleet curtailment is clear. It’s also questionable whether owners of vessels that are not blacklisted will be willing to collect cargoes from those that are.
If this kind of disruption happens at scale, with the significant numbers of additional shadow fleet ships having been sanctioned, then Russia’s freight challenges could become crippling.
And history shows that that is a very real possibility.
NOTE: Julian Lee is an oil strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.
--With assistance from Tom Fevrier.
