US SANCTIONS have hiked freight rates for dark fleet* Russian cargoes, particularly in the Pacific. But the upside for mainstream very large crude carriers, at least initially, appears more limited. VLCC spot rates are now falling back down and VLCC stocks are giving up a significant portion of their earlier gains.

The current post-sanctions rally is notably different than the spike seen after Cosco tanker sanctions in the second half of 2019. In that case, VLCCs were put on subjects and charters failed because owners found higher prices and moved on to better deals. There was panic among charterers.

In this case, there is no panic; subs are failing because charterers are confident in cheaper deals.

“Momentum in the VLCCs market has stalled after multiple fixtures failed at the end of last week, bringing activity to a halt,” said Clarksons Securities analyst Frode Mørkedal. He noted that some of the fixtures reported last week by brokers “failed almost immediately”.

The Baltic Exchange time charter equivalent VLCC index fell to $49,393 on Tuesday, down 11% versus Monday and down 13% versus the post-sanctions peak on Friday.

Stock traders are rapidly losing faith in the thesis that severe US sanctions on Russia will cause a sustained gain in VLCC rates.

At Tuesday’s close, shares of Frontline were down 13% from their post-US sanctions peak, with International Seaways and Okeanis Eco Tankers down 11% and DHT down 10%.

Shares of mid-sized crude tanker and product tankers were simultaneously under pressure on Tuesday following the announcement that the Houthis will cease targeting non-Israeli ships passing through the Red Sea. Tanker stocks were down across the board.

Massive upside for tankers carrying Russian cargoes in Pacific

The freight market that has been most acutely impacted by US sanctions — tankers carrying Russian ESPO crude from the Russian Pacific port of Kozmino to northern China — is effectively closed to Western vessels due to the US and G7 price cap.

According to price-reporting agency Argus, freight in this route skyrocketed to $6.97 per barrel in the week of January 17, 3.6 times higher than its prior level. It said that the latest rate was at “the highest level since Argus began the assessment” and reflected “ship operators of unsanctioned vessels seizing the opportunity to raise rates”.

ESPO crude out of Kozmino has traded well above the $60-per-barrel price cap of the US and G7 since that restriction was instituted in December 2023. New US sanctions are now driving down the price of ESPO, as well as Russian Urals shipped from Baltic and Black Sea ports.

Argus assessed the price of ESPO loaded in Kozmino at $68.37 per barrel on Tuesday, down 13.5% from January 13. The premium versus the price cap has now fallen to $8.37 per barrel, less than half the premium of $19.07 per barrel on January 13.

Russian freight rates in Baltic and Black Sea also rising

The latest US sanctions largely targeted tankers active in the Kozmino-China trade, which clearly violated the price cap, but the effect is spreading to markets for exports of Russian Urals crude out of the Baltic and Black Sea.

According to assessments by Argus, the price of Urals shipped out of Primorsk in the Baltic Sea was down 7.5% on Tuesday versus January 15, and the price of Urals out of Novorossiysk in the Black Sea was down 6%.

But the price of Urals out of the Baltic is still $5.86 per barrel above the price cap, and the price of Urals out of the Black Sea is still $6.76 per barrel over the price cap.

The continued premium versus the price cap means that European owners need to steer clear of the Russian trade, and leave it to unsanctioned dark fleet tankers. Furthermore, the focus of US sanctions on the Kozmino exports is pulling more unsanctioned dark fleet tankers to the Pacific, a further positive for freight rates for Russian dark fleet exports out of Europe.

According to Vortexa, “Russia is reallocating ‘clean’ [unsanctioned] vessels to prioritise the Far East trade. At least five ‘clean’ aframaxes have joined the trade between January 1 and January 20” that have “previously been active on other Russia routes”.

“Russia’s Far East crude exports averaged 1.2m barrels per day in 2024, equivalent to 48 aframax-size cargoes per month. To maintain this level of supply exclusively for China, Russia would need to dedicate at least 16 aframaxes to this route,” said Vortexa.

Russia’s focus on curing the shipping dilemma in the Far East is already indirectly boosting rates for dark fleet tankers carrying Russian Urals out of the Baltic and Black Sea, although according to Argus, “gains have been more muted”.

The biggest gainer: Freight for aframaxes carrying Russian Urals from the Baltic to the west coast of India jumped 27% in the week ending January 17 versus the prior week. Other assessments for Russian crude shipments from the Baltic or Black Sea to China or India increased 18%-22% week on week.

Argus also assesses a “sanctions premium” by comparing a Russian cargo assessment to a comparable non-Russian trade baseline. These premiums increased sharply in the wake of US sanctions, but are not yet at historical highs.

In the Black Sea, the Novorossiysk to India west coast and north China aframax freight rates for Russian cargoes are both now at a 202% premium to the baseline, with suezmax trades at a premium of around 180%, according to Argus assessments.

In the Baltic, Russian aframax freight out of Primorsk is now at a 176% premium to the baseline for cargoes to north China, and at a 187% premium for cargoes to India’s west coast.

All of which is theoretically very positive for mainstream VLCCs. The more expensive it is to ship Russian cargoes on dark fleet aframaxes and suezmaxes — whether from Primorsk, Novorossiysk or Kozmino— the more that China and India should tap mainstream VLCC cargoes for replacement supplies.

Nevertheless, the sense of urgency among VLCC charterers seen in past sanctions incidents is not there yet.

* Lloyd’s List defines a tanker as part of the dark fleet if it is aged 15 years or over, anonymously owned and/or has a corporate structure designed to obfuscate beneficial ownership discovery, solely deployed in sanctioned oil trades, and engaged in one or more of the deceptive shipping practices outlined in US State Department guidance issued in May 2020. The figures exclude tankers tracked to government-controlled shipping entities such as Russia’s Sovcomflot, or Iran’s National Iranian Tanker Co, and those already sanctioned.