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Affinity Policy Comment 27 June 2022

Playing a losing game

The Group of Seven club of wealthy nations on Monday vowed to stand with Ukraine "for as long as it takes", promising to tighten the squeeze on Russia's finances with new sanctions that include a proposal to cap the price of Russian oil.

The expanded sanctions would also target Russia's revenue stream from gold exports, Moscow's military production and officials installed by Moscow in areas of Ukraine occupied by Russian forces.

The announcement came after Ukraine's President Volodymyr Zelenskiy, addressing G7 leaders at their summit in the Bavarian Alps via a video link, asked for weapons and air defences to gain the upper hand in the war against Russia within months.

G7 nations, which generate nearly half the world's economic output, want to crank up pressure on Russia without stoking already soaring inflation that is causing strains at home and savaging the Global South.

Meanwhile, a US official said news that Russia defaulted on its foreign sovereign bonds for the first time since the Bolshevik revolution in 1917 showed how effective Western sanctions have been.

For now, the oil price cap proposal has raised several concerns about its practical feasibility. Under the plan, insurance would be withheld from cargoes for which the buyer pays Russia more than a certain price. Since about 95 per cent of the world’s tanker fleet is insured through the P&I clubs in London and some firms based in continental Europe, a ban is certainly feasible.

However, it might not be enough, as Moscow has already begun to put in place an alternative to the P&I clubs, offering insurance through the Russian National Reinsurance Company. That may be good enough for some of the current buyers that are now providing the bulk of the market for Russian crude.

Furthermore, the plan being pushed by Yellen would require the EU to revoke the sanctions it has just agreed to, not an attractive option after the bruising negotiations the bloc went through to get them accepted by all 27 members.

At this point, it’s more likely that the EU ban on seaborne imports of Russian crude and refined products would end up being dropped alongside that on insurance.

So, with no attempt to cut the volume of Russian oil exports, there would just be the hope of being able to reduce their value. But the value of Russia’s crude shipments has already been hit dramatically, reaching a USD 35 discount to Brent.

And in any case, the likelihood of compelling Russia to sell its oil at an externally imposed discount remains very low if not nonexistent. After all, the Russian president has already shown that the country’s economy is of secondary importance to his geopolitical ambitions, and his calculation will almost certainly be that cutting off Russian oil exports will do more damage to the economies of buyers in Europe than it will to Russia.

In other news, this week, market focus turned quickly on chances and depth of an economic slowdown. In Europe, June PMIs surprised on the downside, with readings now just above 50s, vs mid-50s just a month ago.

Higher prices and supply restrictions are gradually affecting expectations, curbing new orders and consumer demand. Germany’s new gas plan may entail rationing and higher consumer prices, adding to the negative outlook.

Finally, Fed officials sounded more worried about chances of a downturn, and US inflation expectations started moving lower for the first time over the past few months. Chances of a recession have increased recently, but according to several analysts, they are still well below what’s priced in markets.

Based on current economic trend, some estimate chances of a US recession over the next two years at 60 per cent, compared to 95 per cent implied by asset prices.

Moreover, tailwinds from post-Covid re-opening mean that if a slowdown comes soon, it is likely to be more shallow than comparable historical episodes, with growth rates unlikely to fall into negative territory for long.

Meanwhile, rates markets tightened aggressively over the last week, as investors focused on higher chances of a slowdown.10-year Bunds and Treasuries are back respectively at 1.4 per cent and 3.1 per cent, 40 basis points off recent highs. Front-end rates followed the move.

While central banks are currently more concerned about growth, high levels of inflation make it difficult to fully backtrack from a hawkish attitude. Powell testimony in front of the Congress this week acknowledged higher economic risks but put inflation firmly as the priority.

The ECB just turned more hawkish in June and will be hard to backtrack without hurting credibility. The bar in terms of economic weakness appears thus quite high for central banks to re-orient their priorities, and rates markets may put too many hopes in central bank support this week. EU inflation data on Wednesday will be an important market pivot and may help markets refocus on inflationary risks and hikes.


Affinity Research LLP

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  • Carbon

    Carbon

    Using tailored analytics platforms, we offer client-specific advisory and trading services across the global carbon markets. Contributing to hedging strategies, sustainability reporting and financing requirements, our aim is to assist clients in managing their financial exposure to the approaching energy transition.

    Contact: Hugo Wilson
    [email protected]
    +44(0)20 3142 0121

    Dry Cargo

    Dry Cargo

    Our dry bulk chartering teams in Sydney, Melbourne, Perth, Santiago, Lima, Montevideo, Buenos Aires, Singapore and London are cargo-focussed and they fix voyage, COA and time charter business on behalf of their clients with a wide range of ship owners.
    For Atlantic business please contact Hans Bredrup
    For Pacific business please contact Rahul Khanna

    Contact: Hans Bredrup
    [email protected]
    Contact: Rahul Khanna
    [email protected]

    LNG

    LNG

    Our young and dynamic LNG team possess wide-ranging experience of spot and term charters working with all major LNG shipowners and charterers. The LNG team has close interaction with the Newbuilding and Sale & Purchase divisions with an unrivalled track record of contracting LNG newbuildings and in the sale and purchase of LNG assets.
    We maintain up-to-date knowledge and an understanding of new technologies within the LNG sector to ensure that our clients can make the most suitable and cost-effective decisions on shipping solutions.

    Contact: Joni Mackay
    [email protected]
    +44(0)20 3142 0133

    Newbuilding

    Newbuilding

    Our Newbuilding team has concluded over 500 newbuildings of all types, including LNGCs, FSRUs, drillships, crude tankers, product tankers and dry cargo vessels. We have contracted in all major newbuilding centres globally, with particular focus on the Korean Shipyards.

    Contact: Nick Wood
    [email protected]
    +44(0)20 3142 0111

    Offshore

    Offshore

    Affinity Offshore is based out of our Oslo and Houston offices. The Team focuses on world-wide sale & purchase of offshore support vessels, as well as chartering – particularly in the Americas and Mediterranean/MENA regions.

    Contact: Tor-Øyvind Bjørkli
    [email protected]
    +47 2109 8210

    Research

    Research

    Our research department combines real time market information with econometric modelling and the latest technology. 

    Contact: Sevita Kondyliou
    [email protected]
    +44(0)20 3142 0182

    S & P

    S & P

    Our Sale & Purchase team has extensive experience of working with private clients, national shipping companies, major corporates, oil companies, grain houses and institutional investors. We provide a cradle to grave services across all shipping sectors. We operate from London, Singapore and Seoul to give 24-hour coverage of the markets, working for both newbuilding and second-hand buyers.

    Contact: Tom Morrison
    [email protected]
    +44(0) 20 3142 0128

    Tankers

    Tankers

    Our established tanker chartering teams serve the industry from London, Houston and Santiago delivering a highly proficient spot chartering service with a prime position in the fuel oil market. The team has close relationships with oil majors, national oil companies, oil traders and major ship owners and operators. 
    Our ethos for operations and post-fixture is simple: these roles are as important to us as the chartering/commercial function, and we continue to apply those same principles of professional ship broking throughout the life of each fixture.

    Contact: Tim Gurdon
    [email protected]
    +44(0)20 3142 0142

    Valuations

    Valuations

    We provide transparent, objective ship valuation service to major owners, banks and other financial institutions at short notice and a daily basis. We provide a retainer service for regular fleet valuations.

    Contact: Ben Pusey
    [email protected]
    +44(0)20 3142 0125

    Carbon

    Using tailored analytics platforms, we offer client-specific advisory and trading services across the global carbon markets. Contributing to hedging strategies, sustainability reporting and financing requirements, our aim is to assist clients in managing their financial exposure to the approaching energy transition.

    Contact: Hugo Wilson
    [email protected]
    +44(0)20 3142 0121

    Dry Cargo

    Our dry bulk chartering teams in Sydney, Melbourne, Perth, Santiago, Lima, Montevideo, Buenos Aires, Singapore and London are cargo-focussed and they fix voyage, COA and time charter business on behalf of their clients with a wide range of ship owners.
    For Atlantic business please contact Hans Bredrup
    For Pacific business please contact Rahul Khanna

    Contact: Hans Bredrup
    [email protected]
    +56 99 887 3036
    Contact: Rahul Khanna
    [email protected]
    +61 418 448 677

    LNG

    Our young and dynamic LNG team possess wide-ranging experience of spot and term charters working with all major LNG shipowners and charterers. The LNG team has close interaction with the Newbuilding and Sale & Purchase divisions with an unrivalled track record of contracting LNG newbuildings and in the sale and purchase of LNG assets.
    We maintain up-to-date knowledge and an understanding of new technologies within the LNG sector to ensure that our clients can make the most suitable and cost-effective decisions on shipping solutions.

    Contact: Joni Mackay
    [email protected]
    +44(0)20 3142 0133

    Newbuilding

    Our Newbuilding team has concluded over 500 newbuildings of all types, including LNGCs, FSRUs, drillships, crude tankers, product tankers and dry cargo vessels. We have contracted in all major newbuilding centres globally, with particular focus on the Korean Shipyards.

    Contact: Nick Wood
    [email protected]
    +44(0)20 3142 0111

    Offshore

    Affinity Offshore is based out of our Oslo and Houston offices. The Team focuses on world-wide sale & purchase of offshore support vessels, as well as chartering – particularly in the Americas and Mediterranean/MENA regions.

    Contact: Tor-Øyvind Bjørkli
    [email protected]
    +47 2109 8210

    Research

    Our research department combines real time market information with econometric modelling and the latest technology. 

    Contact: Sevita Kondyliou
    [email protected]
    +44(0)20 3142 0182

    S & P

    Our Sale & Purchase team has extensive experience of working with private clients, national shipping companies, major corporates, oil companies, grain houses and institutional investors. We provide a cradle to grave services across all shipping sectors. We operate from London, Singapore and Seoul to give 24-hour coverage of the markets, working for both newbuilding and second-hand buyers.

    Contact: Tom Morrison
    [email protected]
    +44(0) 20 3142 0128

    Tankers

    Our established tanker chartering teams serve the industry from London, Houston and Santiago delivering a highly proficient spot chartering service with a prime position in the fuel oil market. The team has close relationships with oil majors, national oil companies, oil traders and major ship owners and operators. 
    Our ethos for operations and post-fixture is simple: these roles are as important to us as the chartering/commercial function, and we continue to apply those same principles of professional ship broking throughout the life of each fixture.

    Contact: Tim Gurdon
    [email protected]
    +44(0)20 3142 0142

    Valuations

    We provide transparent, objective ship valuation service to major owners, banks and other financial institutions at short notice and a daily basis. We provide a retainer service for regular fleet valuations.

    Contact: Ben Pusey
    [email protected]
    +44(0)20 3142 0125

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