US Weighs Shadow Fleet Sanctions Relief to Cut Oil Freight Costs

MONTREAL (Oil Monster): The United States is considering limited sanctions relief that could allow some blacklisted “shadow fleet” tankers to carry non-sanctioned crude oil and petroleum products, as record freight rates constrain global energy flows and raise the delivered cost of fuel.

The discussions center on allowing otherwise legal oil to move aboard vessels previously sanctioned for transporting petroleum from Russia, Iran or Venezuela, according to a U.S. official cited by Reuters.

The proposal has not been finalized. Companies seeking to use sanctioned vessels would need authorization from the U.S. Treasury Department, and the potential relief would not permit those ships to transport oil that remains prohibited under U.S. sanctions.

U.S. Considers Letting Sanctioned Tankers Carry Legal Oil

The proposal under discussion would create a pathway for some sanctioned vessels to return to otherwise lawful oil trade.

A U.S. official told Reuters that the concept involves allowing “legal oil” to move aboard previously sanctioned tankers.

In this context, legal oil means crude oil or petroleum products that are not themselves prohibited by U.S. sanctions.

The potential authorization would therefore apply to the vessel rather than automatically changing the sanctions status of the cargo's country of origin.

Treasury Approval Would Still Be Required

Companies seeking to charter sanctioned vessels would need authorization from the U.S. Treasury Department.

The exact mechanism has not been announced, but Treasury's Office of Foreign Assets Control, or OFAC, can issue licenses permitting transactions that would otherwise be prohibited.

The discussions therefore do not amount to a blanket removal of the shadow fleet from U.S. sanctions lists.

Administration Says Russian and Iranian Oil Would Remain Restricted

The U.S. Department of Energy told Reuters that any relief involving sanctioned tankers would not be intended to help Russia move sanctioned crude oil or petroleum products.

Iranian crude also remains subject to extensive restrictions, while the U.S. blockade has reduced Iran's seaborne exports to zero, according to Vortexa.

The proposed change is instead aimed at making additional vessels available to transport permitted crude and fuels.

ALSO READ: U.S. Blockade Cuts Iranian Crude Exports to Zero

Record Freight Costs Are Driving the Discussion

Tanker freight rates have surged to record levels as conflicts in the Middle East and Ukraine disrupt shipping routes, reduce vessel availability and increase insurance costs.

The freight shock has become large enough to affect which crude grades refiners can economically purchase.

Asian refiners have increasingly looked toward Middle Eastern and Latin American supplies as high shipping costs weaken the economics of moving U.S. crude across long distances.

Energy Secretary Chris Wright discussed potential shadow-fleet sanctions relief during the World Petroleum Congress in Riyadh as part of efforts to address those transportation costs, Reuters reported.

Shipping Can Now Add Tens of Dollars to Every Barrel

The scale of the freight increase is unusually large.

Reuters reported that the supertanker Esteem Explorer is expected to cost approximately $81 million to move crude from the United States to Japan.

That equates to roughly $40.50 per barrel in transportation cost.

A comparable voyage cost about $9.1 million one year earlier.

The dramatic increase shows why available production alone no longer provides a complete picture of global oil supply. Crude must also be economically transportable to refiners.

Higher Freight Costs Are Feeding Into Fuel Prices

Expensive tanker transportation ultimately increases the delivered cost of petroleum.

Reuters calculations indicate every additional $10 per barrel in crude transportation costs could add roughly 23 cents per gallon to U.S. gasoline prices if passed through the supply chain.

Current freight costs could therefore contribute materially to retail fuel inflation even without an equivalent increase in the underlying crude price.

ALSO READ: OPEC+ Says Shipping and Insurance Costs Top One-Third of Cargo Value

OPEC+ Has Already Warned About the Shipping Crisis

Oil-producing countries have increasingly focused on logistics rather than production alone.

OPEC and non-OPEC ministers meeting in Riyadh said this week that shipping and insurance expenses have reached unprecedented levels exceeding one-third of commodity value in parts of the disrupted energy trade.

The ministers warned that those costs are slowing crude and petroleum-product movements and adding inflationary pressure to both producer and consumer economies.

Energy Aspects Expects Only Modest Freight Relief

Allowing some sanctioned tankers back into legal trade may not significantly reduce global freight rates.

Energy Aspects said many vessels sanctioned over Russian or Venezuelan connections have remained active during the past three months.

As a result, removing U.S. restrictions would not necessarily introduce large amounts of completely unused tanker capacity into the conventional market.

The firm said the measure could nevertheless make a limited number of additional vessels available for specific trades, including shuttle movements around the Strait of Hormuz.

EU and UK Rules Could Still Restrict the Same Tankers

U.S. authorization would not automatically eliminate every legal and commercial obstacle facing a sanctioned ship.

Maritime industry sources told Reuters that European Union and United Kingdom rules could continue affecting insurance and other services required by vessels.

A tanker that receives U.S. permission may therefore still have difficulty obtaining mainstream insurance, financing or other maritime services.

This is another reason analysts expect the effect on global freight costs to be limited unless other jurisdictions make similar changes.

Iran Shadow Fleet Was Just Hit With New U.S. Sanctions

The discussions come only days after Washington significantly expanded sanctions on Iran's oil-shipping network.

On October 8, the U.S. Treasury said its latest action targeted the remaining elements of Iran's aging shadow fleet and its supporting network.

Treasury described the action as effectively neutralizing most of Iran's remaining shadow-fleet system used to move petroleum to foreign buyers.

Any new licensing policy would therefore require a clear distinction between permitting a sanctioned vessel to carry legal cargo and allowing the vessel to resume sanctioned Iranian trade.

Russian Diesel Deal Adds Another Layer to Policy

The shadow-fleet discussions also follow the Trump administration's decision to temporarily ease restrictions affecting Russian diesel.

Russia has committed to provide more than 300,000 metric tons of diesel immediately, followed by additional volumes later this year.

The measure has drawn opposition from Ukraine, several European governments and U.S. lawmakers who argue that additional Russian energy revenue could support Moscow's war effort.

The administration says the measure is intended to increase fuel availability and relieve extreme diesel prices.

ALSO READ: Oil Falls as Russian Diesel Deal Eases Supply Fears

Freight Costs Have Reduced Demand for U.S. Crude

The tanker shortage has had a direct impact on U.S. producers.

Long-haul crude exports from the United States become less competitive when freight rates rise faster than transportation costs from suppliers closer to Asian refiners.

The administration's interest in releasing additional vessel capacity therefore has both a consumer-price and U.S.-export dimension.

Lower shipping rates could improve the competitiveness of American barrels while reducing delivered crude costs for overseas refiners.

Middle East Oil Flows Could Also Benefit

Additional vessel availability could be especially useful in the Middle East, where producers have been using unusually complex transportation systems to keep oil moving.

Ship-to-ship transfers, tanker shuttle operations and alternative terminals have helped Gulf countries restore exports despite persistent security risks around the Strait of Hormuz.

Energy Aspects said limited sanctions relief could make some additional tankers available for those shuttle operations.

However, the firm does not expect the measure alone to normalize freight markets.

Oil Prices Fell After the Proposal Emerged

Oil prices declined Thursday as traders assessed the possibility that additional tanker capacity could improve energy flows.

Brent crude futures fell about 2.2% to $103.78 per barrel Thursday morning, while West Texas Intermediate crude was down approximately 1.4% at $93.75.

The decline was limited by continuing tanker attacks in the Middle East and renewed strikes on Russian energy infrastructure.

The market reaction reflects the growing importance of transportation constraints in crude pricing.

Shadow Fleet Does Not Describe One Uniform Group of Ships

The term “shadow fleet” generally refers to vessels used to transport oil outside conventional Western shipping, financing and insurance systems, often in connection with sanctioned trade.

However, vessels can be sanctioned for different reasons and under different legal authorities.

Some have transported Russian oil, others Iranian or Venezuelan cargoes, while ownership, management, flagging and insurance arrangements also differ.

Any U.S. relief would therefore likely need to identify specific eligible vessels or transactions rather than treat the entire shadow fleet as one category.

Policy Could Highlight the Difference Between Oil Supply and Shipping Supply

The current crisis has exposed a distinction that can be overlooked when markets focus primarily on production.

The world can have enough crude available at producing fields while still experiencing tight effective supply if there are not enough commercially usable vessels to transport it.

That is why freight rates can rise at the same time crude exports are recovering.

Increasing tanker availability could improve effective supply without requiring producers to pump another barrel.

What Happens Next

The administration must decide whether to proceed with vessel-specific sanctions relief and what conditions companies would have to meet.

Any authorization would likely require involvement from the Treasury Department and could be structured as licenses for specific vessels, transactions or cargoes.

Markets will also watch whether shipowners, insurers and charterers are willing to use the vessels if U.S. restrictions are eased but European or British restrictions remain.

The ultimate test will be whether additional vessels enter mainstream crude and product trades in enough numbers to materially reduce freight costs.

Frequently Asked Questions

Is the U.S. lifting sanctions on the shadow fleet?
Not yet. The Trump administration is considering limited relief, but no final policy has been announced.

Would sanctioned tankers be allowed to carry Russian or Iranian oil?
The proposal described by U.S. officials concerns allowing certain sanctioned vessels to carry otherwise legal oil. It does not automatically authorize crude or petroleum products that remain sanctioned.

Why is the U.S. considering the change?
Record tanker freight and insurance costs are increasing delivered oil prices, limiting crude flows and reducing the competitiveness of U.S. exports.

Would companies need government approval?
Yes. Reuters reported that companies seeking to use sanctioned vessels would need authorization from the U.S. Treasury Department.

Would easing U.S. sanctions immediately lower global tanker rates?
Energy Aspects expects only a limited impact because many sanctioned vessels are already active and EU and UK restrictions could continue limiting insurance and other services.

What is a shadow fleet tanker?
The term generally describes tankers operating outside conventional Western shipping, financing and insurance systems, often to move oil associated with sanctioned countries or entities.

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Sources: Reuters; U.S. Department of the Treasury; U.S. Department of Energy.

Courtesy: www.reuters.com