Brent prices initially rose above $85 per barrel due to OPEC+ production cuts but have now fallen below $75 per barrel due to concerns about global economic health. However, there is a possibility of tight supply in the second half of 2023 if OPEC+ continues with production curbs and demand increases, particularly driven by China. Although OPEC+ might remove the production curbs if the market remains in deficit for an extended period in 2H23, a surge in oil prices would raise the likelihood of Russian crude prices exceeding the G7 price cap of $60 per barrel, as reported by Hellenic Shipping
Oil price cap
The oil price cap imposed on Russian crude oil by the G7 and EU prohibits Western companies from providing transportation, insurance, and financing services if the oil is sold above $60 per barrel. While many Western companies have been servicing vessels carrying Russian oil below the cap since the sanctions took effect in December 2022, obtaining such services may become challenging if global oil prices rise, pushing Russian crude above the price limit. Recently, Lloyd’s Register announced the revocation of certification for 21 vessels belonging to Gatik Ship Management, a significant carrier of Russian crude, while St. Kitts & Nevis International Ship Registry deflagged 36 vessels from the same company. Although the exact reasons for these actions are unclear, the possibility of a breach of the price cap cannot be disregarded.
Independent cargo value tracking
The lack of independent cargo value tracking for Russian crude creates reluctance among service providers to deal with ships carrying such cargo, particularly if oil prices rise in the second half of 2023. While direct sanctions do not apply to Russian crude trade using non-G7 or non-EU insurance and financial services, the limited alternatives for these services make trading Russian crude more challenging in a high-price environment. This situation is expected to create a significant disparity in freight rates between vessels carrying Russian and non-Russian cargo, leading to a two-tier charter market. Additionally, the potential for an increase in grey trade and ship-to-ship transfers cannot be ignored. Grey trade could further strain the crude tanker fleet’s efficiency, exacerbating the existing supply tightness. Despite a potential global crude trade growth cap due to inventory drawdowns, the anticipated supply squeeze in the crude tanker market is likely to maintain firm freight rates in the second half of 2023.
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Source: Hellenic Shipping