Sanctions and the Tanker Freight Market
The US Middle East policy of shoot first and explain afterwards continues to bear fruit. The assassination of Iran’s military commander Qassem Suleimani kicked off 2020 with a ratcheting-up of the arm-wrestle between the US and Iran. Pundits have predicted an oil price spike but this has yet to be realised and my guess is that it won’t be Iran’s priority to increase oil prices as the US is no longer dependent on Middle Eastern oil. Moreover, while Iran’s oil exports are officially constrained, higher oil prices would only enrich Iran’s regional enemies. Mischief in the Straits of Hormuz can’t be ruled out as there has been plenty of it in recent years and months and we saw what that did to the VLCC market last October.
The US may try to extend its ‘maximum pressure’ on Iran by further sanctioning Iran’s partners, though this may only accelerate moves to trade with Iran outside the dollar system, with long-term consequences for the US.
American sanctions had some unintended consequences in 2019. One might have been the surprisingly strong crude oil tanker freight market we experienced in the final quarter of 2019, when a ten day frenzy in October finally kicked off the fourth-quarter peak season. VLCC average earnings from January to the end of September last year were USD 9,141 basis Baltic Exchange data, before the Q4 average rather rescued owners at USD 70,855. The wider Baltic Dirty Tanker Index dropped below 1,000 points on only the second trading day of 2019 and stayed below 1,000 points until the 2nd of October. Then in September the US sanctioned COSCO Energy Shipping and a subsidiary, and National Iranian Tanker Company VLCCs, just before the attack on Abqaiq in Saudi Arabia temporarily knocked out a large chunk of Saudi exports. The US sanctions removed around 70 Very Large Crude Carriers – around eight per cent of the world’s VLCC fleet – from the spot market and a year of weak demand was saved by a quarter of constrained supply.
Another reason for the weak tanker freight market in 2019 could have been a change in the way China used the global VLCC fleet. My reasoning behind this comes from comparing tracked crude oil imports into China (tracked that is by cleaned up and validated AIS data) with imports reported on spot-chartered ships, for the five years from 2015 to 2019. China is the biggest oil importer in the world over the last five years and its seaborne imports grew by 40% between 2015 to 2016, from an estimated annual average 6.31 Mn bpd to 8.89 Mn bpd, or 329 Mn Tonnes in 2015 up to 464 Mn Tonnes in 2019 (if you prefer your data in tonnes).
For the years 2015 to 2018, reported spot-fixed cargoes imported to China amounted to 69%, 69%, 72% and 71% of total seaborne imports - a relatively stable and high proportion. Not every spot fixture gets reported (I suppose) but an apparently regular proportion is. But in 2019 the proportion of seaborne crude oil imports to China that was reported to have been carried on spot-fixed ships fell to 56%.
Maybe I missed a number of fixtures, but I use the same sources for every year. Maybe the AIS signal quality has changed, but the data has been verified wherever possible in every year. My assumption therefore is that the reduction in spot crude oil cargo imports to China in 2019 as a proportion of the total fell because a number of oil tankers were effectively banned from the spot market, but that didn’t stop them shipping oil to China, presumably being paid in renminbi for the trade. I’ve very happy to know what you think, and if you have data that may confirm or correct my own.
THE TAKE AWAY
There are several take-aways from this data for me, if it is right.
Firstly, 2019 was a rotten year for crude oil tanker markets until sanctions and events in the Middle East sparked a freight market revival just as Q4 started.
Secondly, politics continues to play an important, if not necessarily predictable role in tanker markets just as it does in oil markets.
Thirdly, as the US increases and widens the use of sanctions, its strategic competitors like Iran and China are encouraged to find alternatives to traditional means of trade and trade finance which in the long run will be counterproductive to the US, undermining its position as the global hegemon.