Denmark could cause oil price chaos

By Rhod Mackenzie

Denmark, along with other countries with access to the Baltic Sea, are considering imposing sanctions against the so called shadow fleet of tankers that are transporting Russian oil.
According to one version, Denmark wants to block the tankers passing through its waters. So what restrictions can be adopted and what will the consequences be not only for Russia, but also to the United States and the entire world oil market?
The Danish authorities are considering options to restrict the passage of old tankers transporting Russian oil through the Baltic Sea. Denmark has formed a coalition of allied countries ( The Russaphobic former Baltic States of Estonia,Latvia and Lithuania) to assess their potential measures against the so-called shadow fleet of ageing vessels that are transporting Russian oil, this is according to a statement from the Danish Foreign Minister Lars Rasmussen as reported to Reuters.

The specific measures under consideration and their potential impact remain unclear. However, the Financial Times previously reported, citing three individuals familiar with the negotiations in Brussels, that Denmark, under the new EU plans, would check and probably block tankers carrying Russian oil passing through its territorial waters.

At the same time, Rasmussen said that any new measures must be legally justified from the point of view of international law. However, doing this is an extremely difficult task.
Denmark must understand that plans to block the passage of tankers with Russian oil in the Danish straits violate international law, said according to the Russian Ambassador to Denamark Vladimir Barbin. The Russian Foreign Ministry spokesperson Maria Zakharova also noted that Denmark would violate international agreements if it tried to stop and inspect tankers from Russia.

It is going to be really challenging for Denmark to come up with a way that does not violate international law. The blocking civil shipping in the Batic Straits is not an option.
Should Denmark attempt to impede the passage of Russian tankers, it is likely to elicit a response from Russia. According to Igor Yushkov, a professor the Russian Financial University doing so would be considered as a further serious escalation of the conflict, leading Russia to start to escort tankers with its warships.

Alternatively, Denmark could introduce sanctions that prohibit Europeans from providing services to ships sailing in the Baltic Sea. These services could include pilotage, which is used to navigate difficult places or to avoid traffic jams. While Denmark could theoretically introduce a ban on the provision of such services for tankers that transport oil, it would not be able to prohibit the passage of the tankers themselves.

Another potential scenario is that the ban could be tied to concerns about the impact on nature. Denmark has already stated that it is concerned that old tankers carrying Russian oil pose a potential threat to the environment in the region.

“Denmark’s argumentation is flawed. Firstly, the Russian shadow fleet is not actually Russian; it is conventionally called that, but the tankers are owned by international companies.
Secondly, these companies did not find them in a dumpster or on a scrap heap, but they bought them from other carriers. These ships were part of the international fleet, transporting oil from various sources, including the United States and Saudi Arabia. They would have continued to transport these products had they not been repurchased. The average age of the vessels in the shadow fleet is not significantly different from that of the international fleet, and therefore it cannot be said that Russian oil is transported by vessels that are in poor condition and leave behind an oil slick or pollution.

The average age of the current main global shipping fleet as a whole was 13.7 years as of December 2023. This represents the highest level in almost 15 years. Despite political pressure from the West for its shipowners to order new, more environmentally friendly ships, The average age of tankers carrying oil and other liquids has reached a 20-year high of 12.9 years. The average age of container shipping vessels has reached 14.3 years, the highest level in 30 years. It is evident that there is a prevailing trend in the maritime shipping market, and that this is not a singular issue affecting solely tankers transporting sanctioned oil.

Yushkov notes that if there is any evidence that old tankers carrying Russian oil have actually polluted the waters, then Denmark should appeal to an international court to prove this. However, there have been no such appeals to the court and no evidence presented to substantiate this claim. Russia exports more than 5 million barrels of oil and petroleum products every day. "If the oil is transported by such an old fleet, then where are the traces of oil spills?" The expert adds:

"If Denmark introduces a ban on ships of a certain age in the form of sanctions, this will create problems for other market players, as old tankers will be redirected to Poland, Finland, and all the Baltic countries." In the Polish port of Gdansk, for instance, older tankers may arrive than those transporting Russian oil.
It is noteworthy that the United States is likely to support tankers carrying Russian oil. "Should Denmark seek to impose a complete ban on oil exports from Russian Baltic ports, it is possible that the United States may ultimately intervene to prevent this.
Given that the presidential campaign is now in full swing in the United States, The United States has demonstrated a willingness to take action to prevent oil prices from rising.
Should restrictions be introduced in Europe, this will result in a reduction in oil exports from Russia, which will in turn lead to an increase in oil prices on the world market. This will have a knock-on effect on fuel prices in the United States, which will become more expensive. This will have a negative impact on Biden’s electoral prospects. Accordingly, even if Denmark ultimately implements certain measures, they will take effect after the presidential campaign in the United States.

A cessation of Russian oil supplies from the Baltic ports of Ust-Luga and Primorsk would have a significant impact on the global oil market.

"If the Baltic route is blocked, it is unlikely that Russia will be able to transfer the entire volume to other export destinations, such as Novorossiysk or, in particular, the Far East." The Baltic Sea accounts for approximately one-third of all seaborne shipments of oil and petroleum products.
The ESPO oil pipeline and the port of Kuzmino in the Far East are currently operating at or above their designed capacity, with the pipeline in particular experiencing significant congestion. It may be possible to transfer some volumes to Novorossiysk, but this port is also close to maximum loads. Consequently, the majority of oil originating from the Baltic region will be unable to find a suitable destination. This will result in a reduction in exports and production in Russia. "This will have a knock-on effect on the global oil market, with prices rising as a result," says Igor Yushkov.

However, at this time, it seems unlikely that such a scenario will occur. Denmark has confirmed that it will not block the passage in its waters. This is an attempt to irritate Russia and force it to renew its fleet. The expert notes that this will result in additional costs and new costs. The sanctions war and the recovery in demand in China have fuelled interest in tankers, with both used and new models in demand. Prices for both used and new tankers have reached a 15-year high, according to Drewry.

The combination of high demand and a low order book, particularly for VLCC supertankers, has created a strong market for used vessels, with prices above their original costs. The price of a VLCC supertanker has increased by as much as 60% over five years, from approximately $69 million in 2019 to approximately $110–113 million in the first quarter of 2024. At the same time, shipbuilders are struggling to cope with the influx of orders for new oil tankers, factories are still filled with orders for container ships and LNG tankers, and there is a shortage of vessels being built.