The next crisis in the energy market: the shortage of tankers

With the EU embargo on Russian oil and its products about to come into effect, demand for tankers, especially ice tankers, has been climbing
.

In early August, average profits for product tankers jumped to their highest level since 1997, after which profits are likely to continue to increase
.
Global energy markets remain tight, and with tanker prices soaring, inflation in developed markets is likely to worsen
.

Demand for tankers has been on the rise since the EU imposed sanctions on Russia in the spring, a trend that will only intensify
in the coming months as the EU embargo on Russian oil and its products comes into effect.

Shipping companies are scrambling to get as many ice-class tankers as possible ahead of the embargo, which will take effect for crude oil in early December and for petroleum products two months later
, media reported this week.

EU leaders agreed in May this year to impose an oil embargo
on Russia.
The oil embargo will include an exemption for Russian oil flowing through pipelines to Europe, which accounts for one-third
of the EU's oil purchases from Russia.
By the end of the year, EU officials say the embargo will cover 90 percent
of previous imports of Russian oil.
The programme will be implemented
in phases over several months.

According to media reports, current European energy buyers are hoarding Russian oil and its products, which will no longer be available after the embargo is imposed
.
However, these ships will continue to deliver Russian oil and products
in non-European directions.

Svelland Capital's Tor Svelland said in August that demand for tankers has soared since the geopolitical conflict erupted and is likely to remain strong for the foreseeable future, especially because of very limited
supply.

Few tankers have been built in the past few years, and supply is likely to remain tight due to longer cycles in the industry, pushing up transportation costs
for oil and its products.

In fact, last month, the global tanker market saw its strongest demand
in more than 20 years.
In the two weeks to Aug.
8, the average profit of a product tanker jumped to $400,000, the highest level
since 1997, according to a research firm.

However, with energy supplies still falling short of demand in the coming months and the EU embargo on Russian oil and products, this number will only continue to rise and further intensify competition
for a limited fleet of tankers.

Danish shipping company Torm said:

The EU's ban on Russian oil products from February 2023 will trigger a realignment of the oil trading ecosystem, some of which has already begun
.

Europe "detoured" to Russian energy, transportation costs soared

European sanctions on Russian energy mean that Europe cannot directly buy Russian crude oil and products, but Russia can export crude oil to other places and process it in third countries before exporting it to Europe
.
It's just that for Europe, in addition to a significant increase in transportation costs, it also has to buy processed Russian energy
from third countries at higher prices.

When the sanctions come into effect, more tankers will be involved not only shipping Russian oil and products to non-European destinations, but also more tankers supplying oil and its products to Europe from non-Russian locations, most likely including Asian countries that process Russian crude and may export processed Russian crude to Europe
.

With the entry into force of the EU embargo on oil and its products, Russia will turn to new customers
in Asia, Africa and Latin America.
The EU itself will need to source fuel
from places like the Middle East, the United States and Asia.

Due to the tight supply, it will definitely increase the premium in the price of petroleum products, so many Asian countries will buy Russian oil, then process it and sell it to Europe
at a high price.

At the same time, the United States is also limited in its own fuel stocks, especially middle distillate stocks, diesel and jet fuel
.
This means that Europe will struggle to get enough help from the United States, which could further push up energy prices
in Europe.

Another factor in high energy prices: a record decline in refining capacity

In addition to the expected tight supply in the tanker market, which will have a noticeable impact on energy prices, the global energy market remains tight and is expected to continue for years to come
.

One important reason for this is the record decline in global refining capacity, which fell by 3.
8 million barrels
per day between March 2020 and July 2022, according to the S&P Research report.

While refining capacity has shrunk, demand for fuels has increased by 5.
6 million b/d, leaving a considerable gap
with capacity-based supply.
S&P research suggests that about 2 million b/d of new refining capacity will come online by the end of next year
.

However, further capacity additions by global refineries are much less likely, as refiners believe that the energy transition will reduce demand for crude oil in the future
.

Due to the combination of multiple headwinds, the price of fuels, especially in Europe, is likely to remain high in the future
.