Commodities
Analysis-Russian oil flows through Red Sea still face lower risks
© Reuters. FILE PHOTO: A tanker crosses the Gulf of Suez towards the Red Sea before entering the Suez Canal, in El Ain El Sokhna in Suez, Egypt, September 25, 2020. REUTERS/Amr Abdallah Dalsh/File Photo
By Natalie Grover, Robert Harvey and Ahmad Ghaddar
LONDON (Reuters) – Tankers carrying Russian oil have continued sailing through the Red Sea largely uninterrupted by Houthi attacks on shipping and face lower risks than competitors, according to shipping executives, analysts and flows data.
Russia has become more dependent on trade through the Suez Canal and the Red Sea since it invaded Ukraine, which led to Europe imposing sanctions on Russian imports and forced Moscow to export most of its crude to China and India. Before the war, Russia exported more to Europe.
The number of Russian ships passing through the Red Sea has registered a slight decline since December, according to oil analytics firm Vortexa, but traffic last week was still around 20% higher than on average in 2023.
That contrasted to more extensive disruptions overall to oil tanker sailings through the Red Sea in the past two weeks.
Shipments of diesel and jet fuel from the Middle East and Asia to Europe – one of the major east-to-west oil trade routes – nearly came to a halt in the days following the first round of U.S.-led retaliatory strikes on Yemen on Jan. 11, Vortexa data show.
Russia has close ties to Iran, which backs the Houthis, and that may have helped prevent attacks.
Ships carrying Russian oil for the most part have no links to Israel, the United States or Britain. The Houthis have said they are targeting ships connected to those countries in attacks to show solidarity with Palestinians in Gaza.
G7 sanctions on Russia’s oil trade over the Ukraine war contributed to rapid growth in the shadow fleet of vessels transporting sanctioned crude and fuel. Those vessels are leased by companies typically registered outside countries that have imposed sanctions on Russia. They also use maritime services and insurance from countries that do not impose sanctions.
With fewer clear connections to Western companies, those vessels are less likely to be a target.
“Most Russian crude and fuel is transported by the shadow fleet, so its unlikely going to be in the crosshairs of Houthi attacks,” said veteran oil trader Adi Imsirovic.
“The Houthis are targeting ships linked to certain countries.”
Many vessels carrying Russian cargoes are indicating they are not tied to Israel via signals from automatic identification systems (AIS) – which publicly broadcast information including a vessel’s position and destination, Vortexa analyst Mary Melton said.
Russia, a partner to key Arab powers like Saudi Arabia and the United Arab Emirates in addition to its ties with Iran, has condemned what it called the ‘irresponsible’ strikes.
Chinese officials have put pressure on Iran to rein in attacks on ships in the Red Sea and ensure those attacks do not hurt Chinese interests, Iranian sources and a diplomat told Reuters last week.
ATTACK
A Houthi attack late last week on a tanker carrying fuel which originally loaded in Russia was unlikely to impact wider Russian trade flows as that specific vessel was targeted because it had ties to British and American companies, Vortexa’s Melton said.
“The tanker had ties to both US and UK based corporate entities, so other vessels carrying Russian cargoes without these ties do not face a similar risk,” she said.
The attacked tanker Marlin Luanda is owned by Oceonix Services, a company registered in the UK to a London address, according to data from another tracking firm Kpler.
Global commodities trader Trafigura, which owned the cargo, said it was assessing the security risks of further Red Sea voyages.
Four tankers carrying Russian Urals crude passed through the Bab-el-Mandab strait with another three heading south through the Red Sea since the attack on the Trafigura vessel on Jan. 26, Kpler data show.
The flow of Russian oil should continue provided it makes economic sense and insurance cover can be procured given the level of demand from India and China, Ian Wilkinson, VP of sales excellence at Inchcape (OTC:) Shipping Services told Reuters.
Western tankers, however, will likely re-route away from the Red Sea and sail around the Cape of Good Hope, said Shefali Shokeen, a lead shipping analyst with a Dubai-based shipowner.
Either way, shippers are facing higher costs. In the Red Sea, shipowners are charging higher freight rates and crew fees, and war risk insurance premiums have surged.
Crew fees have doubled, while war risk premiums now amount to around 1% of the value of a ship, versus 0.5% about 10 days ago, excluding discounts, according to industry sources.
For instance, costs to charter 1 million barrel-capacity Suezmax ships to send Iraqi oil to Mediterranean refineries have climbed by $2.50-$3.50 a barrel for freight, while insurance has roughly tripled to between 10 and 15 cents a barrel, according to a trader with a European refiner.
The alternative route via the Cape of Good Hope adds two to three weeks to sailing time and an extra 3,300 nautical miles in fuel consumption, in addition to emissions taxes for those owned by or calling at EU states.
LONDON (Reuters) -Oil prices were broadly flat on Thursday as investors waited on developments in the Middle East, the release of official U.S. oil inventory data and details on China’s stimulus plans.
futures were up 25 cents to $74.47 a barrel at 0834 GMT, while U.S. West Texas Intermediate crude futures were at $70.64 a barrel, also up 25 cents.
Both benchmarks settled down on Wednesday, closing at their lowest levels since Oct. 2 for a second day in a row, after OPEC and the International Energy Agency cut demand forecasts for 2024 and 2025.
Prices have also fallen as fears eased that a retaliatory attack by Israel on Iran for the latter’s Oct. 1 missile strike could disrupt oil supplies, though uncertainty remains over how the conflict in the Middle East will develop.
“The country’s forthcoming retaliatory measures against Iran are still not clear,” said John Evans of oil broker PVM.
He added that the Middle East “will certainly provide enough reason to move oil prices again soon enough and investors today will also be preoccupied with an abundance of financial data”.
Among that data are U.S. oil inventories. The Energy Information Administration (EIA) will release its official government data at 11 a.m. EDT (1500 GMT).
The American Petroleum Institute’s Wednesday figures showed crude and fuel stocks fell last week, market sources said, against expectations of a build-up in crude stockpiles. [EIA/S]
“Any signs of weak demand in EIA’s weekly inventory report could put further downward pressure on oil prices,” ANZ analysts said.
PVM’s Evans also cited Thursday’s U.S. jobless claims data at 8.30 a.m. EDT (1230 GMT) and a rate decision from the European Central Bank.
That decision may support oil prices if the bank goes ahead with lowering interest rates again, the first back-to-back rate cut in 13 years, as it shifts focus from cooling inflation to protecting economic growth.
Investors are also waiting for further details from Beijing on broad plans announced on Oct. 12 to revive its ailing economy, including efforts to shore up its ailing property market.
Investing.com — Bank of America analysts argued in a note Thursday that gold is emerging as a more attractive safe-haven asset than government bonds, driven by fiscal concerns and global economic dynamics.
While falling real interest rates typically boost gold prices, BofA notes that “higher rates do not necessarily put pressure on gold,” signaling a shift in how the yellow metal reacts to macroeconomic conditions.
One of the key drivers, according to BofA, is growing fiscal pressure. The U.S. national debt is expected to reach unprecedented levels in the next three years, and interest payments on this debt are likely to increase as a share of GDP.
As BofA explains, “This makes gold an attractive asset,” prompting them to reaffirm their bullish target of $3,000 per ounce.
BofA also highlights that both leading U.S. presidential candidates—Kamala Harris and Donald Trump—show little inclination toward fiscal restraint.
In fact, “policymakers strongly favor fiscal expansion” globally, the bank points out.
Future commitments, including climate initiatives, defense spending, and demographic challenges, could raise spending by as much as 7-8% of GDP annually by 2030, said the bank, citing IMF estimates.
If markets struggle to absorb the increasing debt issuance, volatility could rise, further supporting demand for gold. “Central banks in particular could further diversify their currency reserves,” BofA notes, adding that gold holdings by central banks have grown from 3% to 10% of total reserves over the past decade.
Western investors have also stepped back into the gold market in recent months. Although China’s gold imports fell during summer amid stimulus efforts, non-monetary gold demand from Western participants has increased.
However, BofA warns that short-term gains may be limited as markets factor in “a no-landing scenario for the U.S. and a slower pace of rate cuts,” which could cap gold’s near-term upside.
“There is also a risk that gold may give back some of the recent gains, although we ultimately see prices supported at $2,000/oz,” BofA concluded.
Investing.com — Bank of America (BofA) is forecasting more downside risk than upside to oil prices, with likely settling around $70 per barrel.
In a Thursday note, the bank’s commodities team shared a cautious view on oil due to several factors influencing the market, including OPEC’s supply dynamics and non-OPEC production growth.
“Our base case is $70/bbl (which we think is priced in), but we see more downside oil price risk than upside (OPEC spare capacity could easily cover most scenarios of barrels threatened by wider Middle East conflict),” strategists noted.
A key driver of this risk is the potential for OPEC to bring back an additional 2 million barrels per day to the market, on top of expected non-OPEC supply growth of 1.6 million barrels per day. BofA forecasts that global demand for oil is projected to grow by only 1 million barrels per day next year.
“Our call on OPEC is a very slow return of the ~2mbd – and this suggests ~6-7% of demand as OPEC spare capacity, according to energy data firm Woodmac,” the note continues.
“This ceded share has been higher in the past, but generally only in short, surprise demand downturns, not as a norm. To us, this suggests limited upside to our $70 Brent price and potential downside should OPEC regain share.”
In the current environment, BofA strategists said they prefer gas-linked stocks, particularly midstream companies. They note that while there is currently an oversupply of gas, the medium-term prospects are improving, with positive catalysts expected in 2025 as data center growth and liquefied (LNG) demand start to accelerate.
The team believes the market is underestimating the free cash flow (FCF) potential of their preferred companies, some of which could see payouts increase by 50% by 2027.
Cheniere Energy (NYSE:) remains BofA’s top Buy-rated pick, with the bank predicting FCF inflection towards more than $20 per share in the next three years.
Other Buy-rated energy names include Kinder Morgan (NYSE:), Williams Companies (NYSE:), and Chevron (NYSE:), among others.
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