Volatility for clean tankers increases in wake of Russian refinery attacks

Ukrainian drone attacks on Russian refining capacity point to disruption of refined product exports and lower loaded volumes are already weighing on tanker freight rates from the region.

S&P Global estimates that refineries with a combined nameplate capacity of over 1.6 million b/d nationwide have now been affected to some degree by Ukrainian strikes, although the exact amount of capacity currently offline is not clear.

The most recent attack, a strike on Russia's Taneco refinery, marks Ukraine's longest-range drone attack to date and extends the threat to energy infrastructure deeper within Russian territory.

Export shipments of Russian diesel, fuel oil, naphtha and other refined products and feedstocks in March shrank 9% month on month to around 2.26 million b/d, the lowest level since November, according to data from S&P Global Commodities at Sea. Freight rates for clean tanker routes from the Black Sea and Baltic Sea to the UK Continent meanwhile have wobbled in recent days.

Platts, part of S&P Global Commodity Insights, assessed the rate from the Black Sea for a 30,000 mt cargo at $52.12/mt April 3 and the rate for a 40,000 mt cargo from the Baltic at $20.34/mt. These are down from $68.36/mt for the ex-Black Sea assessment March 20 and from $25.73/mt March 15 for the ex-Baltic assessment, although this has edged up since March 26. The assessments are also below their respective five-year averages of $45.37/mt and $17.55/mt.

According to CAS data, Russia's refined product exports -- excluding fuel oil -- totaled around 1.66 million b/d in March, down from 1.74 million b/d in February and 1.9 million b/d in March last year.

Moscow has said that supplies have been buoyed by ramp-ups at other refineries. However, until that happens there could be increased volatility in exports, Tamara Apostolou, an analyst at shipping brokerage BRS told S&P Global.

"Weekly export declines might be followed by jumps and so we might see the mismatch between Russia exports and world imports from Russia growing bigger," she said. As these oil product export-import waves are difficult to time they trigger substitution from elsewhere, she said.

A reshuffled market

Expectations of lower product exports from Russia point to increased gasoil, diesel and naphtha flows out of the Middle East to make up for shortfalls, Apostolou said.

The shortfall could also be served by deliveries from the US and Asia and this scenario benefits Long Range tankers, she said.

Deliveries from the Middle East have risen in recent weeks. Total exports from the region of refined products excluding fuel oil in the week starting March 25 were 6 million b/d, a figure which has risen steadily from 4 million b/d in the week starting March 11, according to data from CAS.

This has yet to translate into higher freight rates. Platts assessed the rate to carry a 75,000 mt cargo of clean products from the Persian Gulf to UK Continent at $76/mt April 4. While this is up from $60.67/mt on March 11, it has declined steadily from $105.33/mt March 20.

Russia has not supplied EU markets for over a year and its volumes have rerouted to destinations such as Brazil and Turkey.

Europe, amid new sources of supply, has had to contend with longer voyages for its supplies, as cargoes of refined product from the Persian Gulf go around the Cape of Good Hope to avoid attacks by Yemen's Houthi fighters in the Bab al-Mandab Strait.

However, Europe has seen diesel cracks decrease, Rebeka Foley, an oil analyst at S&P Global, said.

On the supply side, Europe has seen its sources of deliveries widen, and its own refineries are due to come back from maintenance after April. This comes as demand is weak, she said. "We've seen this reshuffling and the prices and diesel crack softening really is an indication that the market is rebalancing," she said.

Diesel cracks in Northwest Europe are expected to be $24.39/b in April, falling to $21.96/b in September and then rising to $24.61/b in December, analysts at S&P Global said in their Europe Refined Products Short-Term Outlook for April. This compares with a five-year average of $20.24/b over 2019-2024.

Fuel oil steady

Exports of fuel oil, traditionally a mainstay of Russian refined product exports, are broadly steady.

Russia exported 731,000 b/d during the week starting March 25, a 28% drop week on week but higher than the first week of March and within the five-year average, according to CAS data.

Exports in March overall averaged 660,800 b/d, down 7% month on month.

Disruption to shipments of any barrels could continue for at least the short term and there could be further downward pressure, not least as the international sanctions regime against Russia, in response to its invasion of Ukraine in February 2022, is showing signs of intensifying, Fotios Katsoulas, a shipping analyst at S&P Global, said.

"More owners might avoid lifting Russian cargoes in the future... It's driven by the recent sanctions on companies by the US, which is keeping more owners away from the Russian cargoes," Katsoulas said.