RThe Russian-Ukrainian conflict has succeeded in altering tanker trading patterns, but Chinese buying activity is and will remain a barometer of tanker recovery.

Six months have passed since the Russian invasion of Ukraine, which took most of the world, and therefore the maritime markets, by surprise. Early in the invasion, differing opinions were brought to light regarding the overall impact the conflict would have on tanker markets.

In this overview, we will attempt to assess the changes in demand for tankers before and after the invasion on the most affected trade routes, but also on the global shipping scene. Through this, we will try to understand if the current market volatility is solely based on developments related to the Russia-EU relationship or if there are other key factors at play.

Average monthly number of voyages and average mileage per voyage % change: post vs pre-invasion, by ship class (data retrieved by Voyages API/SDK)

Globally, since the beginning of the Russian-Ukrainian conflict, the three main dirty classes have seen some increase in the average number of trips per month compared to the first quarter of 2022 (pre-conflict). Suezmaxes showed the largest increase while the number of trips by Aframaxes and VLCCs remained virtually unchanged. Contrary to the trend seen in the number of voyages, the average voyage mileage decreased for VLCCs and Suezmaxes, with Aframaxes being the only tanker class of the three to travel considerably further after the conflict.

Although the increase in travel is marginal – apart from Suezmaxes – it reflects the gradual recovery in demand following the COVID-19 pandemic. High product cracks in regions without domestic rough production such as Europe, prompted higher rough flows. Likewise, the emergence of shorter routes has reduced the turnaround time of loads. By exploring the ton-mile changes on the relevant trade routes, we can see more clearly the impact of the Russian-Ukrainian conflict on the demand for ships for each class of tanker.

Percentage (left) and absolute (right) change in monthly average ton-miles for selected trade routes: after and before invasion (data retrieved by Voyages API/SDK)

Starting with VLCCs, we again see minimal change in global ton-miles, but definite change in trading patterns. In the graph above we notice a strong increase in VLCC ton-miles to Europe, this can mainly be attributed to the increase in intra-Atlantic flows, mainly from the Gulf of the United States and partly related upon release of the SPR. In addition, more VLCC ton-miles came from the transport of Russian grades, which were destined for India and China. Nevertheless, increasing intra-Atlantic basin flows, including the cannibalization of other routes by VLCCs (such as Brazil to Europe) meant shorter trips compared to trips to China, which ultimately reduced mileage average VLCC despite increased activity.

Moving on to Suezmax tankers, it is clear that much of their business is geared towards transporting Russian grades, while a smaller portion of the increase also comes from transporting crude from the US Gulf to the United States. ‘Europe. Russian ranks were increasingly transported from the Black/Baltic Sea to India. In addition, Suezmaxes also penetrated some unconventional routes such as the Russian Far East to China (TD24) and increased their activity by 20% on the Middle East to Mediterranean route (TD23) after the conflict. This increase in activity on shorter routes has reduced Suezmax’s average mileage in the same way as VLCCs.

Of the three tanker classes, the Aframaxes showed the largest increase in global ton-miles after the invasion. This is not surprising as they experienced an increase in the number of trips, but more importantly, much higher mileage per trip. While maintaining the ton-mile on the US Gulf route to Europe (TD25), the Aframaxes also capitalized on the buoyant activity on the Baltic route to India from April. Aframaxes have found refuge in long-haul travel following a 15% drop in demand on the very short-haul trans-Mediterranean trade route, which overall has led to an increase in average mileage per trip.

Overall, VLCC and Suezmax show changes in business models due to the conflict. However, global ton-mile demand remains unchanged for these vessel categories, showing that weak Chinese import activity is also an important factor. In contrast, for Aframaxes, the Russian invasion pushed this segment into new markets, triggering the combination of increased trips and mileage per trip, which ultimately led to increased ton-mile demand.

Medium term outlook
On December 5, 2022, the EU’s ban on Russian crude oil transported by sea will come into force, eliminating all arrivals except Bulgaria. This effectively means that around 1.1 mbd of Russian crude (700 kbd from shipping and 400 kbd from Druzhba pipeline) will have to find alternative outlets, as detailed in this news blog. As it stands, there are probably two contenders ready to take back those barrels: China and India, with the rest of the third countries keeping a distant position. This scarcity of buyers will make it difficult for Russia to maintain its current production levels. Nevertheless, the wait-and-see approach currently observed by Chinese state-owned refineries on the supply of Russian barrels could well change in the future. Chinese buying is particularly sensitive to firm prices and the steep discounts anticipated on Russian crude and the probable resumption of flows to China will probably replace the current appetite observed for crude from the Atlantic Basin (mainly from the Americas).

On the other hand, Europe has a multitude of sources to replace its Russian dependence. Sources that can satisfy the region’s demand range from short proximity regions like the Caspian, North Africa and the North Sea to medium proximity regions like North and South America, the Middle East and West Africa. Higher exposure to the former regions is poised to boost demand for Aframax, while higher exposure to the latter will likely shift the balance towards Suezmax tankers. Yet for either of these scenarios to materialize, greater freight pull from China is needed to divert VLCCs from employment in European destinations. This could be the case as current import levels in China continue to be low and regardless of the impact of any fiscal stimulus, they look unsustainably low at these levels.

Overall, the signals regarding the future development of tonne-kilometres are mixed. There is an advantage on long-haul opportunities on VLCCs carrying marginal barrels from the Atlantic Basin to the East, which will give more breathing space to Aframax and Suezmax tankers bound for Europe. However, it should be emphasized one last time that this increase in VLCC ton-miles is mainly dependent on China’s buying behavior. Potential flows from Russia to China could occur to some extent on dark voyages or via sanctioned vessels, limiting employment growth for the majority of the fleet and therefore supporting freight rates.
Source: Vortexa by Ioannis Papadimitriou, Senior Cargo Analyst (https://www.vortexa.com/insights/freight/crude-tankers-russian-invasion-sets-the-tone-but-chinas-behavior-has-the- last -say/)