Weight of Freight: Russian trade flows pressure dirty tanker freight

Author Hamren Hamid, Reporter, Freight and Andrew Khaw, Editor, Asia Freight

The shift in trade patterns with the continuing Russia-Ukraine conflict has pressured freight rates lower for dirty tankers, as reduced tonne-mile-demand and a lack of Russian volumes shipped on larger vessels has led to a vicious downwards cannibalisation within the tanker segment. Is this trend here to stay? Or are there potential upsides?

WCI LS Spread

Freight rates for 130,000t Suezmax shipments from the Mideast Gulf to east Asia and to the west coast of India on 8 February fell by 17.2pc and 26pc respectively to WS120 and WS111, based on 2023 flat rates, from WS145 and WS150 on 3 January following increased competition from VLCCs, given limited enquiries for the larger vessels.

VLCC shipowners saw India-bound Suezmax shipments as an easy alternative, given the higher freight rates and lack of restrictions for VLCCs at Indian ports. VLCCs have resorted to cannibalising Suezmax shipments, as demand has been limited and as tonnage supplies built up over the year-end holiday period. Freight rates for the larger VLCCs have also lagged significantly behind Suezmaxes at the start of 2023. Lump-sum freight rates for Suezmax shipments led by $660,000 on 4 January on the Mideast Gulf-west coast India route. VLCC lump-sum freight rates have since made a comeback, taking the lead by $216,000 on 8 February. But the spread continue to lag behind 2022’s peak premium of about $1.15mn on 21 November.

Rates for 80,000t Aframax shipments from the Mideast Gulf to east Asia and to the west coast of India over the same period fell by 22.5pc and 22.3pc respectively to WS197.5 and WS200, based on 2023 flat rates, from WS255 and WS257.5.

Aframax freight rates have also been pressured by competition from Suezmaxes but mainly fell in January following reduced flows to east Asia against the previous month. Shipments from the Mideast Gulf to east Asia also fell by about 24.5pc from a month earlier to 4.43mn t in January, according to vessel departure data from Vortexa. Chartering activity, even directly between shipowners and charterers has been limited.

WCI LS Rates

The shift to Russian crude

Heavily discounted far east Russian crude created demand from India and China, offsetting flows of base-load Mideast Gulf crude into both countries.

Chinese imports of Russian crude, primarily ESPO Blend, increased to 1mn b/d in January from December's 870,000 b/d, of which more than 80pc headed to independent refiners in Shandong province. Chinese crude imports from the Mideast Gulf dropped by 14pc over the same period to around 9mn b/d, tracking data from Vortexa show.

India imported less than half of its crude from the Mideast Gulf in January for the first time in several years, as the country's refiners boost purchases from Russia. The Middle East's share of Indian oil imports was estimated to have dropped to 48.2pc in January — the lowest level since at least 2016 — from 50.3pc in December 2022 and 68.2pc in January 2022, Vortexa data show. India is scheduled to receive 2.2mn b/d from the Mideast Gulf in January against 2.91mn b/d in January 2022. India imported 1.4mn b/d of crude from Russian ports, including CPC Blend of Kazakh origin, up from 1.23mn b/d in December 2022 and 66,000 b/d in January 2022. Imports from Russia excluding CPC Blend were 1.25mn b/d.

Crude exports from Russian ports had slipped in December, after the EU's ban on Russian seaborne imports came into force, but rose by 20pc from the previous month in January to 3.24mn b/d. February exports are expected to recover towards the pre-ban volumes in November 2022.

Is there no hope for Mideast Gulf crude?

Established trade patterns capitalising on lower priced Russian crude will likely remain. But opportunities for new and increased crude flows from the Mideast Gulf is also present, as the region has shifted its attention to other Asian buyers such as Japan and South Korea that have stopped buying from Russia.

South Korea's crude imports rose marginally in December after the EU ban, on the back of higher refinery runs, with imports from the Mideast Gulf higher from the previous month and a year earlier. Imports from the Mideast Gulf in December rose by 5pc from November to around 1.932mn b/d.

Japan imported around 2.73mn b/d of crude in 2022, up by 9.7pc on a year earlier, according to preliminary data released by the country's trade and industry ministry on 31 January. The country raised crude purchases from its main suppliers during the year, while it halted Russian deliveries from June following the Russia-Ukraine conflict.

Mideast Gulf producers may reduce slightly official formula prices of their March-loading exports to Asia-Pacific, which could help demand to recover.

So what’s the outlook for dirty tanker freight?

Freight rates for dirty takers have the potential to increase, despite current circumstances, as a GDP increase in China and India in 2023, according to the IMF and OECD will likely result in a firm demand outlook for the year.

China and India’s 2022 crude imports have reached similar levels to before the Covid-19 pandemic of about 13.9mn t, according to Vortexa. The two countries will account for half of global growth this year compared with 10pc for the US and eurozone combined, the IMF said.

Beijing ended its zero-Covid policies and started to reopen the economy and is on course to rebound strongly, raising market expectations for an oil demand recovery. Domestic travel in January was running 18pc above a year earlier, mobility data show.

China's GDP is now projected to expand by 5.2pc in 2023, the IMF said in an update to its World Economic Outlook published late on 30 January, up by 0.8pc from its previous forecast made in October.

The OECD forecasts Indian GDP to grow by 5.7pc in the April 2023 to March 2024 fiscal year compared with the global average of 2.2pc, on the back of domestic production targets.

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