(Bloomberg) -- Another week, another gentle turning up of the heat by Group of Seven nations on the fleet of tankers moving Russian petroleum around the world, writes Bloomberg oil strategist Julian Lee.
The west is moving inexorably toward a moment at its policymakers have sought to avoid: actions that might actually disrupt the flow of oil from a major exporter.
On Monday, the British government sanctioned 11 more tankers for their role in moving Russian oil. It takes to 62 the number of vessels currently targeted — one more that was sanctioned early on was subsequently removed from the list.
Not long after UK’s actions, new Prime Minister Kier Starmer had tough words to say when, alongside 44 European nations, he announced a plan to tackle the Russian shadow fleet.
“Alongside our European partners, we have sent a clear message to those enabling Putin’s attempts to evade sanctions,” he said. “We will not allow Russia’s shadow fleet, and the dirty money it generates, to flow freely through European waters and put our security at risk.”
To be clear, existing measures have been disruptive, with the tankers in question largely prevented from moving barrels. But it’s harder to see that they’ve cut oil supply or boosted freight costs.
One-third of state-controlled tanker company Sovcomflot PJSC’s fleet of oil tankers — including crude, products and chemicals carriers — is now under sanction, according to industry data compiled by Bloomberg.
The proportion of the shadow fleet of vessels that’s been amassed to haul Russia’s oil and avoid the G-7 nations’ price cap is much smaller.
The size of that fleet, often older ships with unknown ownership and unclear insurance, has been estimated at more than 600 vessels. The 30 that have been sanctioned so far represent just 5% of the available tankers, implying there’s still a large number that could be targeted.
But the more steps that are taken, the more the fleet moving Russian barrels gets squeezed, and the greater the risk of oil-market consequences.
Moscow has a few obvious choices if this process continues:
Carry On
The west is forever at risk of self harm if it sanctions Russia too aggressively and successfully.
Oil prices might rise, freight markets might get so constrained as to be a big problem in the wider petroleum market.
Moscow may just carry on as normal, waiting see how far the west is willing to go, and whether G-7 nations are prepared to do anything so oil-market disruptive as to undermine their own economies.
They haven’t so far.
Cut Exports
A cut in exports is already happening, although not obviously because of restrictions on its tanker fleet.
The country’s own refineries are processing more crude, meaning fewer barrels are available for customers, and Russia has committed to pumping less as part of supply commitments it made to OPEC+.
For an export cut to benefit Russia and hurt the west, the price of its barrels must rise to a point that compensates Moscow for the lost volume. That’s most likely to happen if the wider oil price rises, which would be a blow for policymakers in Washington, Brussels and London.
Western Ships
Moscow has largely shunned a fleet of tankers that are either western owned, or that use western services.
That’s because, to use them, such vessels must be able to demonstrate that the barrels they are transporting were purchased at or below certain caps: $60 a barrel for crude, $100 for premium fuels, $45 for discount ones.
It made sense less to use price-cap ships and services when the predominant sanctions were being imposed for breaching the threshold.
But the targets have now shifted: more and more tankers are being targeted either because they belong to the state Russian tanker company Sovcomflot, or because they are viewed as shadow fleet ships that pose an environmental risk.
If Russia can’t use shadow fleet tankers, or its own ships, and if it wants to maintain exports, then price-cap vessels may have to be a bigger part of its supply chain again.
Western service providers might well be much more nervous about dealing with Russia now than they were previously, because the G-7 — and in particular the US Treasury’s Office of Foreign Assets Control — has shown it is willing to act when it believes price-cap violations have taken place.
But if the G-7 were to take its shadow-fleet sanctions too far, then there would be a price to pay. The removal of these ships ultimately affects global tanker supply and if too many are idled by sanctions, then Russia might compete with the west for the vessels that remain. That can cause a wider increase in shipping costs.
Work Around
Yes, there has been widespread disruption to the fleet of tankers moving Russian oil, but it mightn’t always be that way.
Sovcomflot so far sent three of its sanctioned tankers, filled with crude, out to Asia from a port in the Russian Black Sea.
The first transferred its cargo onto another ship east of Singapore, while hiding its position. The cargo was subsequently shifted onto a third vessel according to TankerTrackers.com Inc., which specializes in interpreting satellite imagery to spot sanctions-busting tankers.
The other two disappeared from automated tracking systems south India in June. One has yet to reappear, and one was spotted by TankerTrackers.com transfering its cargo in the waters between Oman and Iran. The Russian ship was not visible on automated tracking systems, while the receiving vessel was sending a signal that it was somewhere other than its true location.
If the ships’ cargoes can be delivered without attracting the attention of the US Treasury, the authority that sanctioned all three of the Russian tankers, then that would undermine the west’s measures.
If Russia can bring its sanctioned tankers back into more normal operation, the G-7 moves would be rendered less effective.
But the fact that Russian oil shippers feel the need to go to the lengths of hidden cargo transfers suggests that buyers aren’t willing to openly defy US sanctions by accepting Russian cargoes delivered on sanctioned tankers. That will add to the cost of hauling barrels on those vessels, even if they become more active.
What Next?
So far, the enforced idling of ships that would otherwise be hauling Russian crude and refined products doesn’t appear to have had an impact on the wider tanker market.
Freight rates are under control and the premium that traders must pay to move sanctioned Russian barrels has been steady, data from Argus Media show.
So for now, Russia’s oil companies appear to have enough ships to call on to move their oil.
The bottom-line question is: does the west truly want to change that?
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.
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