Bunker markets avoid Russia as supply tightens across Black Sea: expert

As Russia's war in Ukraine deepens, bunkering activity has moved away from Russia as shipowners avoid Russian-origin cargoes and Russian companies are unable to secure letters of credit.

With bunker prices reaching record highs, and volatility increasing across global oil markets in the wake of Russia's invasion of Ukraine, there is a major shortage of 0.5%S and marine gasoil cargoes in the Black Sea region. This has been driven by companies self-sectioning to avoid reputational damage from taking Russian-origin products.

"Companies are avoiding Russian-origin cargoes for many reasons. They face significant reputational risk and a lot of cargo purchasers are not keen to take that risk. There is also the threat of potential sanctions on Russian cargoes coming into effect." said Michael Malamen, head of trading at PMG Holding, at S&P Global Commodity Insights Middle Distillates conference April 1.

Related story: Russia to dominate market outlook moving forward(opens in a new tab)

Credit Shortage

Financing is also another big problem facing Russian bunker markets at the moment, said Malamen. Buyers and suppliers have turned cautious following increased financial sanctions against Russia, and it has become increasingly difficult to get credit to buy Russian-origin cargoes.

With transparency of deals more crucial than ever in the processing of credit amid sanctions on the Russian financial sector, banks are avoiding opening letters of credit with anyone linked to Russia or Russian entities.

While pre-payment is a viable option for some companies, the steep backwardation across bunker markets currently means that many companies are unlikely to use pre-payment methods. Sanctions against the SWIFT payment system in Russia(opens in a new tab) have also meant that pre-payment with rubles is out of the question.

Learn more about sanctions: Infographic: sanctions on Russian energy and commodities explained(opens in a new tab)

Some suppliers are offering open-credit terms and this is only to the major players, who are avoiding Russian cargoes for reputational risk reasons, said Malamen. Additionally, high bunker prices are causing buyers to max out their credit lines quickly, with credit costs rising due to increased insurance prices.

"The cost of credit and financing has increased massively," said one bunker supplier. "Insurance companies are looking more into who is trading with whom which is causing problems as prices rise."

Russian bunkering re-routed

Meanwhile, ships are avoiding bunkering operations at Russian ports in the Black Sea, and instead re-routing to neighboring ports.

With decreased demand facing Russian ports, and a lack of Ukrainian ports to bunker at, some shipowners have opted to bunker in Bulgaria.

"Bulgaria has been pretty stable for bunkering, and it isn't too close to Ukraine, so some shipowners are going there," said Malamen. "But the incumbent bunker supplier in Bulgaria is Lukoil, so shipowners are skeptical of taking product from them."

A similar pattern can be seen in Romania, which is benefitting in terms of cargo turnover due to transshipment from Ukraine. However, again the major suppliers in Romania are Russian-associated Gazprom and Lukoil so shipowners are skeptical of doing business with them. This has meant that smaller Romanian suppliers have been benefitting from an influx of business, Malamen said.

Some shipowners have opted to bunker at Istanbul, but a lack of product has pushed up prices substantially. With price differences of $200-$300/mt between ports, bunkering at Russian ports is still quite lucrative to some players, he added.

Future of Russian Bunkering

Any Russian tanker, bunker or crude oil product transported on Russian vessels faces significant scrutiny, and while Europe has not actively prohibited the entrance of Russian flagged vessels, local port authorities are skeptical about letting them bunker, Malamen said.

It has also become increasingly difficult to insure Russian flagged vessels, with additional war-risk premiums paid on vessels in the Black Sea reaching unprecedented levels, he added.

While the Sea of Azov is officially closed at the moment, it has historically been a bloodline for cargoes moving in and out of Russia, said Malamen, adding that questions remain on the future of shipping in the region. The river navigation has officially opened in the Azov Sea, but currently only dry bulk, such as grain(opens in a new tab), is shipped there by river barges for ongoing exports via tankers. For oil products it is more likely that they will travel north to the Baltic Sea ports, such as St. Petersburg, for further transshipment, but that route typically opens in late May, according to market sources.