Sanctions, Shipping, and Oil Markets
In just over a week, the theoretical cost of taking a barrel of oil from the Gulf to Asia, in the cheapest possible way, rose by $6 per barrel. At a time when refinery margins are in single digits, this is a major blow to refinery profitability. The US administration’s decision to sanction two subsidiaries of China COSCO Shipping Energy, alongside announcements by global traders including Exxon and Unipec that they are banning the use of vessels linked to oil flows from Venezuela have effectively taken close to 300 of the global tanker fleet offline. In addition, longer sailing times from the US to Asia tie vessels in for longer, while ships are entering dockyards for retrofits ahead of the new maritime rules that come into effect on 1 January 2020. In short, a perfect storm seems to have hit the shipping industry. As a result, refiners and traders, will look to buy regional grades, ideally with dedicated vessels. Arbitrage movements will become unattractive. Unless committed, US exports from Houston will be postponed as much as physically possible. The impact on LNG markets is harder to read due to less liquid freight market. Depending on the number of affected vessels, the impact could be even greater as LNG is harder to store and a large proportion of vessels are still dedicated to particular projects. The market seems to believe that the situation will not remain tight for long, but barring a relaxation of sanctions—which will likely be harder than the market expects—oil and gas trading may be getting first glimpses of what de-globalisation looks like.