US sanctions impact on VLCC tanker market may be short-lived

The sharp rise in Very Large Crude Carrier rates from the Persian Gulf to Asia following new US sanctions may prove temporary, according to market watchers, as key buyers China and India show limited signs of permanently shifting away from Russian crude imports.

VLCC rates from the Persian Gulf to China jumped 58% to $16.89/mt between Jan. 10-20, according to Platts, part of S&P Global Commodity Insights, after the US Treasury blacklisted over 180 ships and dozens of entities in its latest sanctions package targeting Russian oil trade. China and India, both major importers of Russian crude, also said they were less willing to keep receiving the same volumes, throwing the focus on the Middle East to fill any supply shortfall.

But the rate spike appears more complex than just sanctions impact boosting Asian demand for the Middle East’s oil, according to Fotios Katsoulas, a shipping analyst at Commodity Insights.

“The onset of the Lunar New Year has also provided a boost to VLCC freight rates and this has to some extent exacerbated the appearance of the sanctions’ effect, this has about another week to go,” Katsoulas said.

VLCCs in particular have benefited from this for two reasons; China mainly imports on VLCCs, and buyers there fix ahead as they worry tonnage will not be enough, Katsoulas said.

China’s, India’s response

Although the G7’s “price cap” on Russian crude has been in place since December 2022, only now have India and China responded in a meaningful fashion to Moscow’s use of the growing “shadow” tanker fleet able to avoid compliance with the mechanism. Just before the latest batch of punitive measures, on Jan. 7, China’s Shandong Port Group, whose terminals are often used by Chinese independent refineries that rely on Iranian, Russian and Venezuelan crude, blacklisted ships sanctioned by the US Treasury.

India’s near-term oil supplies are unlikely to be affected despite sweeping sanctions on Russian oil, thanks to a two-month winding down period allowing refiners enough time to work out a future sourcing roadmap, senior government officials said.

There has been speculation that China, the world’s largest seaborne crude importer, may distance itself from Russian barrels because of the incoming US administration, which implies a tougher trade stance on China, analysts at S&P Global Commodities at Sea(opens in a new tab) said on Jan. 13.

Analysts at ship brokerage BRS anticipate that China and India fear secondary sanctions if they deal directly with sanctioned tankers and entities, so are more likely to shun direct discharges at their ports.

But this pressure from the US may not last. US President-elect Trump and Ukraine’s foreign ministry have said talks are expected to take place after the inauguration on Jan. 20. US President-elect Trump and President Putin may come to an agreement to roll back sanctions in exchange for concessions, analysts at Deutsche Bank said in a research note.

On the part of China, there have been no signs of any strategic repositioning that would suggest a newfound respect for US sanctions, with no announced changes to the co-operative relationship between China and Russia, they added.

Indian buying or Russian barrels has essentially been opportunistic. One likely reason is that greater discounts were possible under the oil price cap and these could again tempt refiners, Deutsche Bank said.

This might require further policy action; Platts assessed the discount of Urals on a FOB basis to Dated Brent at $12.05/b on Jan. 17, well-below a post-invasion average of $23.59/b.

Potential greater Urals discount

Around 95% of newly sanctioned vessels loaded crude oil and refined products that originated from Russia while some of the remaining sanctioned vessels loading oil originated from Iraq and Iran. Total transported volumes were 1.8 million b/d of crude oil and refined products in 2024; of that figure, 1.5 million b/d consisted of Russia-origin crude to markets primarily in China and India, analysts at Commodity Insights said on Jan. 11.

“The expectation is that Indian refiners will now increasingly shift back to taking crude from exporting regions such as WAF [West Africa], US,” Adam Lanning, senior tanker analyst at ship brokerage Simpson Spence Young, told Commodity Insights.
There may be methods that independent refiners in the Shandong Hub can bypass the ban — for example ship-to-ship transfer along the East China coast — but this would likely lead to increased shipping costs so would be an unattractive option, he added.
Source: Platts