DynaMarkets Monitor - Are sanctions set to shake up the tanker market again?
In yet another move that could shake up the tanker market, the US has recently signalled a renewed attempt to put pressure on Venezuelan oil exports. The sanctions, which have now been in place for almost 18 months, have caused Venezuelan oil exports to fall to historic lows and reached just 450,000 barrels per day through the month of May. While there have been high profile crack downs by the US, including the placing of sanctions on Rosneft Shipping and Trading and Cosco Shipping Tanker Dalian, Petróleos de Venezuela, S.A. (PDVSA) has still been managing to ship its crude to a number of destinations, including Malaysia, India and Togo before blending and reaching end markets in China, reportedly via a number of Greek owned tankers. Towards the end of May, the US Treasury Department announced that it was to place the registered owners of four tankers on the sanctions list, the sanctioned vessels included two VLCCs, one Suezmax and one Aframax owned ultimately by Greek interests. The move itself has not generated too much cause for concern as the impact on the market of sanctioning a registered vessel owner and single ship owning entity is very small. Yet, the high profile nature of the group owners and managers of these vessels, namely Dynacom, Thenmaris NGM Energy and Chemnav Shipmanagement has caused jitters in the market and the prospect that the management entities themselves could be targeted.
Venezuela has the largest proven oil reserves in the world and the income generated is seen as the lifeline of the socialist president Nicolas Maduro and his government. Since the crisis in Venezuela began, the choking of oil exports has long been seen as a key tool of the US but the success has been somewhat disputed. Throughout the imposition of sanctions there has been number of waivers, including some that benefitted US oil majors, such as Chevron, as well as loopholes through which Venezuela’s PDVSA continued to export sizeable oil cargoes. Since mid-May, the signals coming from Washington have changed, indicating a renewed desire to choke off Venezuelan oil exports. At the beginning of May, a source at the White House stated that “Flag registries, shipping companies and their associated suppliers/vendors be warned: Illegal transactions with the illegitimate regime of Venezuela’s Nicolas Maduro may subject you to crippling financial and economic sanctions”. As such, as well as a renewed vigour in cracking down, it appears as though Washington is willing to step up the measures in terms of scope, bringing a wider range of shipping companies and suppliers into the spotlight. Shortly after this statement was made, Reuters reported that up to forty vessels were on the lost for potential sanctions in the near term. Further, reports have indicated that President Trump has become increasingly frustrated with the failure of the actions taken so far to oust President Maduro since the disputed election result in 2018. With the US Presidential Election fast approaching and the approval ratings and elections polls show that public opinion may be turning against him, this is not the time that President Trump would like to be associated with ineffectual action against Venezuela, very much of the US’ doorstep.
As mentioned above, the sanctioning of a one or even four single ship owning entities is unlikely to have an immediate of far-reaching impact on the tanker market. However, if we look back to the end of 2019, the impact of the immediate removal of around forty to fifty tankers from the trading fleet as a result of the sanctions placed on Cosco Shipping Tanker (Dalian) shows how disruptive sanctions can be to an already volatile market. As an example, one of the vessels that has recently been sanctioned for trading in Venezuela was under the management of Dynacom Tankers Management at the time, according to shipping industry databases, Dynacom now operates a fleet of some sixty-five vessels.
Tanker rates have seen enormous levels of volatility in recent months, with vessels being fixed at astronomical levels with some even coming close to the USD 300,000 per day mark. While the market has undergone a rebalancing through May, any sweeping action that takes a significant portion of tonnage from the market will no doubt impact rates heavily and generate renewed uncertainty at a time when the wider oil market can be described as fragile, with the supply and demand balance finely poised.
There may be a desire on the part of the US to avoid introducing yet another source of volatility into the tanker market ay the current time and it may prove that the threat of further sanctions, including the possibility that management entities could be targeted, is enough to dissuade the parties that have continued business in the region to cease their business dealings. As of the time of writing, it has been reported that significant Chinese players are thinking about withdrawing their interests in tankers trading with Venezuela and the state owned Brazilian oil company Petrobras has already stated that it no longer intends to hire vessels that have visited Venezuela.
Overall, the market is finely poised having, apparently, come through the worst of the first wave of the corona virus in relative health with tanker operators and owners having enjoyed a strong earnings environment. The situation will no doubt be closely watched and following the flotilla of Iranian vessels that have recently managed to dock in Venezuela carrying much needed gasoline, the somewhat impulsive nature of the Trump administration could, if severe action is taken, generate a third record breaking spike in tanker earnings, volatility and uncertainty in under a year.
With a high percentage of the active tanker fleet trading in the spot market with vessels changing hands between charterers, operators and with the recent changing hands of a number of vessels in the sale and purchase market, the importance of knowing your counterparty, its trading history and past trading behaviour becomes all the more important. With more and more entities seeking to insure themselves from the somewhat chaotic nature of global affairs and market disruption, the value of due diligence in the shipping sector is perhaps going to take on a renewed emphasis over the coming months.