Is the shadow fleet heading for a market downturn?

SHADOW fleet traders have been riding a bull market for the past few years.

Unfettered from the costly constraints of regulation, insurance, basic safety standards and operating within the rules-based order of global trade, those prepared to shift sanctioned crude have been profiting handsomely from a lucrative growth market.

Every time a new sanctions crackdown added yet more tankers to the list of designated entities, a seemingly endless supply of previously mainstream vessels would disappear in the shadows chasing risk premiums.

But is the shadow fleet* bubble about to burst?

There are many unanswered questions about Donald Trump’s Venezuela strategy, however, having seized at least five of the Venezuelan shadow fleet regulars that were collectively carrying around $300m of sanctioned crude between them, it seems clear that market is now closed to anyone other than US approved tonnage.

What that means for the 50 shadow feet tankers Lloyd’s List had been tracking carrying or heading to load Venezuelan crude is not yet clear, but a reshuffle beckons.

The volume of Venezuelan crude floating at sea has spiked to the highest level in more than three years since the US asserted control over Venezuela’s energy resources.

Much of the shadow fleet previous serving Caracas is currently in limbo, but once the current chaos settles down the majority will be heading into either Russian or Iranian trades where they will be facing stiff competition.

The recent regular influx of mainstream tankers to the shadow fleet plus a rapid injection of tonnage displaced from Venezuela will test the upper limit of how far the shadow fleet can grow.

Russia’s crude oil production plunged by the most in 18 months in December, pincered by western sanctions that are causing the nation’s barrels to pile up at sea and a surge of Ukrainian drone attacks on its energy infrastructure.

Ukraine has used drones multiple times over recent weeks to hit oil tankers from Russia’s shadow fleet and oil infrastructure, escalating the war well beyond the Black Sea in the case of December’s Mediterranean hit on Qendil.

At the same time, Russian oil on the water is growing as some buyers continue to show reluctance to take cargoes following sweeping US sanctions targeting the nation’s two largest producers, Rosneft PJSC and Lukoil PJSC.

Right now, the enforcement theatre is focussed on Venezuela, but Russia, Iran and China are watching carefully.

The fate of Marinera (IMO: 9230880) carries consequences well beyond its immediate nexus of Russian ownership.

This was a ship that had previously been content to cycle through fictious flags trading Russian, Iranian and Venezuelan crude over the past four years. But when it was directly under pressure, the immediate play was to seek protection from the Russian flag.

After an ignominious two week pursuit across the Atlantic, the US have apparently answered the question of how far Russia is currently prepared to go in protecting its shadow fleet operators.

For the 40 plus shadow fleet veterans who have spent the past few months quietly reflagging into the Russian register, this week’s show of force, and muted protests from Moscow, offer an instructive lesson in risk management.

Of course, the shadow fleet will now evolve innovative new tactics in response.

Lloyd’s List’s first law of sanctions intervention displacement states that for every action shutting down one illicit activity, an equal and opposite reaction will result in that illicit activity appearing elsewhere.

The second law states that the harder you try to stop an illicit activity, the more complex and difficult to track it becomes in response.

But there is every reason to expect that, as the war in Ukraine risks entering its fifth year, we are about to see a step change in sanctions enforcement.

Despite an impressive volume of sanctions, a lack of transatlantic coordination has effectively allowed Russia to continue trading, albeit at a discounted rate.

Second-guessing Donald Trump’s next move is a fool’s errand, but if the US is prepared to join re-join the EU and UK in moving away from the oil price cap to a full maritime services ban, as we understand they are currently considering, then the shadow fleet will meet a radically different market reality this year.

As Fearnleys pointed out in their new year outlooks, harsher sanctions and quota constraints among Chinese buyers have left significant volumes without a willing buyer, effectively turning these ships into floating storage.

If this trend persists, it could have consequences for the near future. Extended delays in clearing sanctioned barrels would not only strain shipping logistics but also undermine cashflows for producers, discouraging upstream investments and potentially forcing Iran and Russia to scale back production over time. In short, what began as a logistical adjustment has evolved into a structural risk for Russian and Iranian supply growth.

There is much that could yet upturn all expectations, but the shadow fleet is entering a period of potential headwinds and may have reached the end of their bull market run.