Shipping used to be about minimizing the time it takes to get commodities from producers to consumers. Time at sea is a function of sea routes, and different sea routes correspond to different types of vessels. In the case of oil, for example, the three main types of vessels are VLCC,Suezmax, and Aframax vessels. VLCCs(very large crude carriers) carry 2million barrels and are used for long-haul voyages. There are about 800 VLCCs in the world. Suezmax refers to tankers that are capable of passing through the Suez Canal in a laden condition. Suezmax
tankers carry 1 million barrels on long-haul voyages. There are 700 of them. Aframax vessels are “go-fast boats” in comparison, shuttling 600,000 barrels on short-haul trips. There are about 600 Aframax carriers in the world. All this detail is important to know when the flow of oil and in particular, the flow of Russian oil is disrupted. If you trade STIR and cared about money fund reform, you need to follow “oil flow reform” too (reform due to sanctions, not SEC rules).
VLCCs and banks’ LCLoR are interrelated. This is how:
Oil from Russia (Urals) gets loaded on Aframax carrie rs at the Port of Primorsk or the Port of Ust Luga to then be shipped on short shuttle runs to Hamburg and Rotterdam. But if Europe boycotts Russian oil, Russia will have to ship its oil to Asia through much less-efficient routes. Oil must be pumped, oil fields don’t like to be turned off and on, and there are no new pipelines to Asia. Storage capacity can accommodate excess production in Russia for a while, but when storage facilities fill up, oil will have to get moved. Without pipelines, the only way Russian oil can be moved over to China will be through vessels, and this is where things get complicated: it’s uneconomical to transport crude on long-haul voyages on Aframax carriers. If Europe no longer wants Russian oil and Russian oil needs an outlet, and that outlet is a buyer in China (see here), China will need more VLCC carriers to get oil from Primorsk and Ust Luga.
Now the details.
Roughly 1.3 million barrels of oil get shipped from Primorsk and Ust Luga to Europe on Aframax carriers, and these journeys take a week or two to complete. If Russia now needs to move the same amount of oil not to Europe but China, the first logistical problem it face
s is that it can’t load Urals onto VLCCs in Primorsk or Ust Luga because those ports aren’t deep enough to dock VLCCs. Russia will first have to sail Aframax vessels to a port for STS crude transfer (ship-to-ship crude transfer) onto VLCCs. STS crude transfer takes weeks, and after the transfer is done, the VLCC will sail two months east, discharge, and go back to the Baltics, which will also take two months. Conservatively, Russian crude traveled about a week or two before it fueled economic activity(the time it took to sail smaller Aframax carriers from Primorsk to Hamburg) and now will have to travel at least four months before it fuels economic activity.
Worse, it’s not just the time to market that’s getting worse, but we also end up with a ship shortage and a corresponding surge in shipping freight rates: consider that we are still using the same number of Aframax ships as before but now as links in a longer intermediation chain
(the STS crude transfer bit), and we now also need 80 VLCCs to get the oil to the final consumer in China. 80 VLCCs are basically the product of the new, longer shipping routes to China: the logic is that instead of taking a week or so to move the oil to consumers, oil will now take at least 120 days (two months plus two months = four months) to transport, and so 1.3 million barrels per day (which is 75% of a VLCC’s load times 120 days over 2 million barrels ship size is 78 VLCCs in permanent use!
The 80 VLCCs the world will soon be short of represent about 10% of the world’s VLCC capacity, which includes 50 VLCCs that are Iranian flag vessels (NIOC) that are currently being used for floating storage, so the re-routing of Russian crude oil will encumber more than 10% of the global VLCC capacity.
It gets more complicated.