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Bunker fuel demand switch to North Asia likely as sanctions bite Russia

The financial sanctions thrusted upon Russia by the West, in an attempt to push back its aggression against Ukraine, may or may not deter military action but it could certainly shift bunker fuel demand from the Far East Russian ports to North Asia –South Korea, Japan, and China– industry sources said in the week that began Feb. 28.

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Russia’s bunker suppliers sell around 100,000 mt/month of 0.5% sulfur bunker fuel at Far East Russian ports such as Nakhodka and Vladivostok, according to market sources.

“People are very confused now– what is the source of this bunker being procured, what happens if they take it and there is a bit of an issue,” a shipping source said.

Another shipping source echoed similar sentiments: “As sanctions hit Russia, shipowners and operators will need to have a very clear and transparent alternative for drawing bunkers,” he said.

Some Western countries have already ratcheted up barriers, blocking certain Russian banks from the SWIFT international payments system.

“We are still checking with our suppliers. Direct money transfer to Russia will be difficult,” said a bunker trader.

Meanwhile, Canada on March 2 announced new sanctions under the Special Economic Measures (Russia) Regulations in response to Russia’s invasion of Ukraine. These new measures impose restrictions on 10 key individuals from two important companies in Russia’s energy sector — Rosneft and Gazprom — Global Affairs Canada, the department of the Canadian government that manages diplomatic and consular relations among other aspects, said in a statement on its website.

North Asian supplies to the rescue

Market sources said bulk carriers loading coal and fueling at Far East Russian ports to carry it to Japan could be typically affected. As there are no bunkering ports on Japan’s west coast, they usually either make vessel calls at Russia or go to South Korea for bunkering, they said.

South Korea’s Busan and Yeosu ports have historically attracted such traffic when marine fuel availability is tight or prices are high at Far East Russian ports.

While South Korea is bracing for more demand, some of it is also set to trickle into Japan, sources said.

“Demand is flowing to Japan due to the sanctions on Russia. Ships that carry coal, plying between Japan and Russia, started buying bunker fuel at Mizushima and Fukuyama [in west Japan] from Monday [Feb. 28]. Supply in west Japan should be even tighter,” said another bunker trader.

In Japan, however, barge availability remains continuously tight especially in western parts because of a declining number of barges without replacement, bunker traders said.

A fuel oil trader at a Chinese company said China is likely to receive demand from Russia as well.

However, sources said ships will likely bunker at South Korean ports first because of the country’s geographical vicinity to Russia. Some Chinese bunker suppliers said they haven’t seen a demand switch from Russia as yet although they were preparing for additional demand.

Market sources said even if the entire demand moved away from Far East Russia to North Asian ports, there was adequate supply, particularly in South Korea, to cater to it.

“That [100,000 mt/month] is not a big volume,” said a supplier in South Korea.

The 0.5% bunker supply is ample in South Korea as local refiners have been steadily producing while demand is lackluster. High crack margins for marine fuel 0.5%S encouraged the refiners to produce low sulfur fuel oil.

The FOB Singapore marine fuel 0.5%S crack spread hit a two-year high of $24.60/b March 2, the highest since Jan. 22, 2020, when it was at $25.38/b, S&P Global Commodity Insights data showed.

China’s latest quota allocation will also likely prove to be a boon for bunkering.

China’s Ministry of Commerce, or MOFCOM, allocated 13 million mt of gasoline, gasoil and jet fuel export quotas in the first round to seven oil companies for 2022, down 55.9% from the same round in 2021. But it raised the allowances for low sulfur fuel oil quotas by about 30%.

In the same batch, MOFCOM issued 6.5 million mt of fuel oil quotas to CNPC, Sinopec, CNOOC, Sinochem and Zhejiang Petroleum & Chemical, allowing them to send tax-free, domestically produced barrels for bonded bunkering at Chinese ports, sources had said earlier.

Meanwhile Zhoushan, China’s largest bunkering port, is also amply supplied with bunker fuel, with domestic production supported because of high margins for marine fuel 0.5%S, they said.

Higher freight as sanctions bite

One of the most significant fallout of the sanctions on Russia and rise in bunker prices is seen in the rise in tankers’ freight and earnings. Owners who were running into losses as recently as last week, have once again started reaping profits despite higher costs.

“Until last week, bunkers were rising but owners were unable to transfer the higher costs to charterers but this is no longer the case,” said an executive with a clean tankers’ owner.

Bunkers prices have risen around 30% since early last week to almost $900/mt but there is a bigger cushion to absorb these costs by getting higher freight from charterers, the executive said.

Due to uncertainty over gasoil shipments from Russia, Long Range, or LR2, freight on Persian Gulf-Europe routes have almost doubled in just a week to over $3 million and owners are now earning around $22,500/day, market participants estimated.

LR1 freight on the same routes is up 56% during the same period, pushing up daily earnings to $15,500, said a shipping source involved in such deals.
Source: Platts

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