Sky-High: What’s Behind the Spike in Ship Fuel Prices?

Since last year, shippers and consumers have felt the burn from sky-high energy prices. Pandemic-related disruptions and lingering uncertainty have caused price increases for oil, gas, and other energy sources throughout most of 2021—contributing to record-breaking inflation rates across the globe.

Those stresses have continued to accrue in the first few months of 2022. January began with a fresh wave of Covid infections that dealt yet another blow to global supply chains. More recently, the war in Ukraine is doubling down on those pressures. Oil prices have soared past the $100 mark, supply chains have been pushed further into chaos, and the conflict foreshadows to alter global trade permanently.

While the main culprit of sky-high oil and ship fuel prices is the Russian invasion of Ukraine, there are other forces at play contributing to the run-up for shippers.

Economic sanctions

Increased economic sanctions on Russia, one of the world’s biggest oil and natural gas exporters, will undoubtedly disrupt global fuel supplies. Although Western economic sanctions against Russia have not yet extended to energy exports, shippers, energy companies, banks, and other buyers are already steering clear from Russian oil. Worries about physical and financial risks, plus the reputational damage that will cascade from dealing with a warring state, have led firms to conclude that there is little to gain from buying Russian oil right now.

Western oil firms’ reluctance to deal with Russia has created a gap in global supplies and triggered a move toward alternative sources. However, given that Russia is one of the world’s largest exporters of crude, shifting to alternative suppliers will take time and be extremely difficult to achieve in the case of smaller firms.

Low supplies from OPEC

Despite record-high prices, the OPEC+ coalition of oil producers—where the Russian deputy prime minister serves as co-chair—has declined to revise its output levels for April. OPEC’s refusal to increase its output has further constrained supplies and inflamed a market that was already showing signs of overheating before the war. And supplies will keep shrinking as Western firms continue to shun Russian oil and Russia reduces its exports to supply its troops in Ukraine.

Support for an embargo on Russia is growing in the West and among its allies. A ban on Russian oil will further destabilize both economies and supply chains. Additionally, it could push oil prices to $200 a barrel.

War risk premiums and surcharges

Risk premiums are raising ship fuel prices and increasing shipping rates. The jump is spurred by buyers stocking up in preparation for supply constraints. Buyers are also turning to the futures market to lock in prices in advance.

On top of this, shippers will soon have to contend with fuel surcharges from carriers working to salvage profit margins from rising fuel prices. FedEx has already announced hikes to its peak surcharges on parcel and freight shipments. Ship fuel prices, freight rates, and risk premiums are likely to continue climbing as the situation in Ukraine erodes, sanctions tighten, and physical and financial threats to operations grow.

Delays, disruptions in traffic, and constricted capacity

Delays and disruptions in traffic are currently being felt strongest in Europe, around the Mediterranean, Baltic, and Black Seas. Port closures, diversions, closed airspaces, and security measures have all slowed and, in many cases, completely halted the cargo flow in those regions.

Shippers have turned to less fuel-efficient air freight and longer alternative sea routes to speed up shipments, bypass congestion, and safeguard against physical threats. However, more time in the air and the high seas – plus an increased reliance on air freight – will contribute to increased fuel expenses. Plus, the inevitable jump in jet fuel prices will make air freight even pricier than it was before.

What to expect: higher prices, worsening disruptions, and growing uncertainty

Shippers should ready themselves to continue facing the same challenges they have throughout the pandemic—with the added pressures of sky-high oil prices, rising inflation, and increasingly volatile geopolitical tensions. Flexibility and adaptability will continue to rule decision-making. Remaining agile and responsive will determine a firms’ ability to handle disruptions and weather the current situation successfully.

Embracing digital transformation and data-driven decision-making is now more critical than ever before. Access to real-time data will enable more accurate forecasting and improve visibility and responsiveness. CTSI-Global’s business intelligence tools help shippers replace uncertainty with hard data they can leverage into better performance and enhanced response capabilities.

Contact us today and get the support you need to handle any challenge.