How has the shipping sector reacted so far to US sanctions on Canadian oil?

We are starting to see movement both in the forward markets, and more aggressively in tanker equities, as tanker stocks tend to react in real time to these developments. So far, we’ve seen some softness and stress in the VLCC segment, which makes sense given the 10% tariff now applied to China. China is a major crude buyer and imports a significant portion via VLCCs. These tariffs could have a detrimental impact on the Chinese economy. China has become more dependent on the US as a trading partner, even if indirectly, through Vietnam and Mexico. And despite government efforts to shift towards domestic consumption, China’s economy is increasingly export-driven, with exports now accounting for nearly 21% of GDP. This adds uncertainty and a potentially bearish outlook regarding China’s crude demand. As for smaller tanker segments typically involved in the North American crude trade, such as AFRAMAXES lifting cargoes from the east and west coasts of Canada, there hasn’t been much of a reaction yet. However, unless there is a significant cutback in Canadian crude throughput (which seems unlikely at a 10% tariff), we would expect more crude from Canada to be redirected further afield. Similarly, Mexican crude may bypass the US entirely and shift toward longer-haul routes.

How might China respond to 10% tariffs?

We suspect China will take a wait-and-see approach, as its economy is weaker now. It could mitigate some of the impact by doing what Trump wants, such as cracking down on the drug trade, or by increasing its crude imports from the US. China is already facing potential supply losses from Russia and Iran. And while its economy is slowing, it still needs to import 8 to 10 million b/d of seaborne crude.

How do you see US tariff developments affecting India?

Of all the AFARMAX sanctioned vessels by Biden’s team, about two-thirds were actively involved in Russia-to-India trade. So, Indian buyers will need to look for alternative crude sources, with discounts not being as steep as before. However, the fact that so many tankers have been sanctioned doesn’t necessarily mean the shadow fleet will disappear. We’re already seeing secondhand prices skyrocket. Ships that were going for $30 million are now going for around $42 million. Net-net, the shadow fleet needs 50 more tankers to maintain the same level of trade that was happening at the end of December.