In the new era of energy scarcity, one aspect of the situation has tended to be overlooked: the transportation of energy.
Demand for tankers has been rising since the European Union imposed sanctions on Russia in the spring, and this trend is set to intensify in the coming months as the EU embargo on Russian oil and fuels comes into effect.
Bloomberg reported this week that shipping lines are scrambling to get as many ice-class tankers as possible ahead of the embargo that goes into effect on crude oil in early December and fuels two months later.
The ships will be necessary to continue transporting Russian oil and fuel in non-European directions, the report says, as the EU would no longer be able to buy them, although European buyers are currently replenishing Russian oil and fuel stocks in anticipation of the embargo.
The war in Ukraine and the EU’s response to it have already significantly boosted the global tanker market – and with it the freight costs for hydrocarbons.
Since the February 24 invasion, demand for tankers has skyrocketed and is likely to remain resilient for the foreseeable future, not least because supply is quite limited, Svelland Capital’s Tor Svelland told CNBC in August.
Few tankers have been built in recent years and as the industry cannot reverse this overnight, supply is likely to remain tight, driving up the cost of transporting oil and fuel.
In fact, Bloomberg reported again in early August that the global tanker market is seeing the strongest demand in more than two decades. Citing data from Clarkson Research Services, the report said the average profit for an oil products tanker in the two weeks ended March 8 was
Now that number is likely even higher and will continue to rise in the coming months as demand for fuel outstrips supply. The fuel market is already tight, but it’s getting even tighter with the entry into force of the EU fuel embargo on Russia, further intensifying competition for a limited fleet of fuel tankers.
“The EU ban on Russian oil products from February 2023 will trigger a recalibration of the oil trading ecosystem,” Danish shipping company Torm said in a statement quoted by Bloomberg. “Part of this trade recalibration has already begun.”
The recalibration will not only involve more tankers to ship Russian fuel and crude oil 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 are Russian Process crude oil and convert it into fuels, which they then export to Europe, among other places.
In addition to this expected tightness in the tanker market, which will have a noticeable impact on fuel prices, the global fuel market is also tight and is likely to remain so in the coming years.
According to a Portal report citing S&P research, the reason is a record slump in global refining capacity of 3.8 million barrels a day between March 2020 and July 2022, according to a Portal report citing S&P research.
While refining capacity shrank, fuel demand increased by 5.6 million bpd, creating a sizeable gap in supply based on refining capacity. New refining capacity of about 2 million bpd should come online by the end of next year barring delays, which S&P research says is highly likely.
Further capacity increases are much less likely as refiners are wary that the energy transition push will soon turn potential new refiners into stranded assets.
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In this situation, the future does not look bright in terms of fuel affordability or wide availability. With the EU oil and fuel embargo coming into effect, Russia will turn to new customers in Asia, Africa and, according to Bloomberg, Latin America. The EU itself will need to get its fuel from countries like the Middle East, the US and, as mentioned, India and China.
Given the tight supply situation, which would certainly further increase fuel prices, it is not inconceivable that countries that import fuel from Russia, such as the two Asian giants and Saudi Arabia, could choose to do what China does with Russian LNG power: resell to Europe for an additional charge.
Meanwhile, the US is experiencing its own fuel supply constraints, particularly middle distillate supplies, diesel and jet fuel. For Europe, this means that the help it can expect from the US in the form of increased fuel exports would be limited: there simply isn’t enough diesel fuel to export. This could lead to another premium on fuel prices this winter.
Tankers and fuel together will make fuel more expensive this winter as the world tries to fight inflation. Tankers and fuel will not help this fight.
By Irina Slav for Oilprice.com
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