Russia-Ukraine Roundup: Big Surge in Price of Oil
Oil: After relative restraint, prices jumped Monday
When the CME commodity exchange settled Friday, the price of ultra low sulfur diesel (ULSD) was $2.8495 a gallon. That was a grand total of 1 cent higher than where it was on Feb. 3 following weeks of up-and-down swings on the back of the buildup to the Russian invasion of Ukraine and the incursion itself.
But Monday, prices soared. ULSD settled for the day at $3.0134 a gallon, a gain of 16.39 cents per gallon, up 5.75% from the Friday settlement. It’s the first settlement above $3 since June 2014.
There have been no sanctions specifically targeting Russian oil exports. Companies and traders are free to buy as much as they want.
But there were numerous reports over the course of the day that traders were shying away from making Russian purchases. Whether it was a fear of being chastised for dealing in Russian products, or the difficulty in working with Russian banks on transactions, a term developed in online discussions: “self-sanctioning.”This cannot go on endlessly. Russian exports roughly 4 million barrels a day of crude and products to Europe and about 400,000 barrels a day to the U.S. Unlike the 1990 Iraqi invasion of Kuwait, when the entire world then embargoed Iraqi and Kuwaiti exports, there is not enough spare capacity in the world to make up for removing Russia from the list of the world’s suppliers, regardless of whether it is through formal sanctions or simply by individual company decision.
In the meantime, the prospect of losing a significant share of oil from the world market as a result of self-sanctioning or the fallout from financial sanctions making Russian oil difficult to move is a key factor in helping to boost the price. — John Kingston
Air cargo: Closing of air lanes
The European Union and Canada on Sunday barred all Russian aircraft from their airspace in solidarity with other countries that previously denied landing, takeoff and flyover rights. Combined with safety notices to avoid airspace in Belarus and western Russia, this means that cargo airlines will lose direct freighter routes from Asia to Europe.
Taking more circuitous routes will add extra time and fuel cost for the logistics sector, but should be manageable for at least the near future, industry professionals say.
The latest maritime developments include a ban by the United Kingdom on Russian vessels entering its ports.
Container shipping delays of the past year due to COVID supply imbalances and high trade demand could be exacerbated at some ports as carriers relocate cargo destined for Ukraine. Maersk, for example, said it is discharging Ukraine cargo in Port Said, Egypt, and Korfez, Turkey.
The goal is to utilize ports with less yard density that still possess the necessary amount of electric plugs for refrigerated containers used for perishable commodities. — Eric Kulisch
Ocean shipping: Russia-Ukraine conflict spilling into ocean freight movements
Tanker and container shipping are now seeing major effects from Russia’s invasion of Ukraine.
Container lines had already ceased calls in Ukraine for safety reasons and are now preemptively halting calls at Russian ports, even though they’re not required to. Hapag-Lloyd began a temporary suspension of Russian service on Thursday. ONE suspended service to St. Petersburg and Novorossiysk on Sunday. Maersk told customers Monday, “Our preparations include a possible suspension of Maersk bookings to and from Russia on ocean and inland.”
The suspension of calls to Ukraine and Russia is forcing cargo already on the ships to be redirected and dropped at alternate ports, exacerbating congestion and network inefficiencies.
Meanwhile, in tanker markets, sanctions have yet to target the transport of Russian oil, but vessel owners aren’t waiting for that. They’re preemptively refusing to load Russian cargoes. “Few owners are now willing to transport Russian oil, resulting in an undersupply of ships [at Russian export terminals],” said Clarksons Platou Securities on Monday.
As a result, the tankers still willing to load Russian cargo are able to charge dramatically higher rates that “are not representative of the market,” said Clarksons, which reported that smaller Aframax tankers loading Russian crude are getting paid $130,000 per day, up from $5,000 per day last week. — Greg Miller
International trade: Expect significant reaction in agricultural supply
The conflict in Ukraine could not only put pressure on oilseeds exports, but the prices associated with transporting those goods, an agricultural economist and consultant told FreightWaves.
Export shipments of wheat, corn, barley, sunflower seeds and sunflower oil will be restricted because of the war zone in Ukraine and due to economic sanctions placed on Russia, said Oregon-based economist and consultant Jay O’Neill.
Ukraine is considered to be the fourth-largest exporter of agricultural products globally.
“Foreign buyers of these products will have to look to alternative origins and alternative commodities for their supplies,” O’Neill told FreightWaves. “The needed adjustments in the supply chain and logistical pipeline will create increased product cost and added tonne miles to shipments, which in turn will add to the cost of freight.”
The volatile crude market could send fuel and fertilizer prices higher, which could increase costs for global commodity buyers and crop producers, O’Neill said.
The potential shift in global ag trade could result in increased buying interest in U.S. and South American corn and in Australian and Canadian barley. While that might benefit grain producers, that could result in price jumps for consumers, O’Neill said. Global commodity buyers will need to adjust and manage their purchasing programs while keeping an eye on price inflation.
FreightWaves market expert Mike Baudendistel echoed O’Neill’s remarks in Friday’s edition of The Stockout newsletter.
“The main impact that I see the conflict having on CPG companies is that it is likely to exacerbate the cost inflation that the companies have seen and thus elongate the time that it will take for most CPG companies to return their gross margins to targeted levels. That cost pressure is likely to be most acutely felt in ingredient prices, which typically make up about 70% of a CPG company’s cost of sales,” Baudendistel said. “In addition, rising energy prices should contribute to higher transportation costs and higher packaging costs, much of which is petroleum-based.” — Joanna Marsh