The Case Of Kremlin’s Oil. China And Indian Refineries Look At Alternatives, Higher Costs. Oil Hits 3-Month High And Russia Doubles Down ‘Will Continue Oil And Gas Projects’.

In a decisive move to curtail Kremlin’s oil and gas revenues, the United States has recently announced the most extensive round of shipping sanctions in years. Put forth by the Biden administration, this aggressive step targets over 180 vessels, along with dozens of entities and individuals engaged in Russian oil and gas trade and production.

Sanctions Hit Hard

The sweeping sanctions focus on key Russian energy players, including oil giants like Gazprom Neft and Surgutneftegas, and insurers such as Ingosstrakh and Alfastrakhovanie. The US has expanded its scope to authorize sanctions against anyone operating in Russia’s energy sector. A similar strategy was employed earlier against Iran.

The UK has followed suit, also imposing sanctions on Gazprom Neft, Surgutneftegas, and Ingosstrakh. The latter had already faced sanctions in June, with Alfastrakhovanie added to the list in November.

Among the 183 vessels targeted by the US, 155 are oil tankers, many of which belong to Russia-based fleet operators or form part of the so-called “shadow fleet.” This includes vessels with a history of transporting Iranian oil. Notably, 68 of these tankers are listed on Lloyd’s dark fleet list, a classification for vessels that operate with minimal transparency.

China and India in the Crosshairs

The sanctions are expected to complicate oil trade logistics for Russia while pushing countries like China and India—major buyers of Russian oil.

The sanctions also include a determination prohibiting the provision of US petroleum services to individuals in Russia, effective February 27, 2025. A general license allows limited wind-down transactions related to energy until March 11.

China and India, among the largest consumers of Russian oil, now face the challenge of managing these sanctions. The increased costs and logistical hurdles of importing oil could have a cascading effect on their respective economies. Indian and Chinese refiners are reportedly exploring alternative suppliers, a move that could strain their budgets and disrupt energy markets.

Chinese and Indian refiners are turning to oil supplies from the Middle East, Africa, and the Americas as new U.S. sanctions on Russian producers and shipping vessels threaten to disrupt Moscow’s crude exports. The shift is expected to increase oil prices and freight costs, according to traders and analysts.

Analysts predict a sharp decline in Russian oil shipments. According to Kpler’s lead freight analyst, Matt Wright, 143 of the newly sanctioned vessels handled over 530 million barrels of Russian crude last year—approximately 42% of the country’s total seaborne crude exports.

Of these, nearly 300 million barrels were sent to China, while India received the bulk of the remainder. A Singapore-based trader noted that the sanctioned tankers had shipped close to 900,000 barrels per day (bpd) of Russian crude to China in the past year, a trade flow expected to “drop off a cliff.”

The sanctions are likely to force Chinese independent refiners to cut refining output, according to trade sources. Additionally, freight rates are anticipated to rise as the fleet of ships available to transport Russian crude diminishes. India had imported 1.764 million bpd of Russian crude in the first 11 months of last year (36% of its total imports), and China, imported 2.159 million bpd (20% of its total imports).

Traders and industry sources indicate this shift is driving up spot prices for crude grades from these regions as Russian and Iranian oil becomes scarcer and costlier.

Rising Dependence on Middle Eastern Oil

“Prices for Middle Eastern grades are already rising,” said an official from an Indian refinery. “There is no option but to rely on Middle Eastern oil, and we may even have to turn to U.S. oil.”

The sanctions, which target Russian oil insurers, are expected to force Moscow to price its crude below $60 per barrel to maintain access to Western insurance and shipping services. However, Indian refiners are unlikely to wait for such adjustments and are already exploring alternatives, said Harry Tchilinguirian, head of research at Onyx Capital Group.

Tchilinguirian predicts increased demand for Middle Eastern and Atlantic Basin crude, such as Oman or Murban grades, leading to a tighter Brent-Dubai spread. Aggressive bidding for February-loading cargoes is expected to intensify, further boosting prices.

China, the primary buyer of Iranian crude, faces additional challenges. Recent sanctions on tankers dealing with Iranian oil have prompted Chinese authorities to restrict their port access. As a result, China is expected to increase imports of heavier Middle Eastern oil and may also maximize its purchases of Canadian crude via the Trans-Mountain pipeline (TMX), according to Tchilinguirian.

Oil Prices Hit Multi-Month Highs

Global oil prices have surged in response to these developments. Brent crude futures climbed 1.86% to $81.24 a barrel, reaching their highest level since late August. Similarly, U.S. West Texas Intermediate (WTI) crude rose 2% to $78.10 per barrel, the highest since early October.

This rally has been fueled by colder weather, declining U.S. stockpiles, and speculation about tighter sanctions on Iran. The Biden administration’s expansive sanctions package is further straining an already-tight global market, complicating plans for the OPEC+ alliance, which has been considering easing output curbs later this year.

“The new Russian sanctions from the outgoing administration are a net addition to at-risk supply, adding more uncertainty to the first-quarter outlook,” noted RBC Capital analysts.

Since January 8, Brent and WTI crude prices have surged by over 6%, fueled by the U.S. Treasury’s expanded sanctions. These measures target major producers such as Gazprom Neft and Surgutneftegas, alongside 183 vessels involved in shipping Russian oil. The sanctions aim to curb the revenue Moscow uses to fund its war in Ukraine.

The surge in oil prices could pose new challenges for central banks, including the Federal Reserve. Rising energy costs may lead to “stickier” inflation, complicating monetary policy. Investors are scaling back expectations for aggressive interest rate cuts as the U.S. economy demonstrates resilience and price pressures persist.

Impact on Russian Supply and the Shadow Fleet

Citigroup estimates that up to 30% of Russia’s shadow fleet of tankers could be affected by the sanctions, potentially threatening 800,000 bpd of supply. However, the effective loss might be less than half this figure, as buyers may be incentivized by discounted crude prices. Goldman Sachs maintains that Russian oil supply expectations remain unchanged, citing the likelihood of further price adjustments to attract buyers.

Mizuho Bank’s Vishnu Varathan remarked, “Global oil balances should call for stable, not soaring oil prices, as non-OPEC and non-Russian production is expected to comfortably keep pace with demand. Russian oil could leach into global supplies despite the sanctions—a scenario that has played out repeatedly.”

The sanctions have amplified price swings in oil markets. Bullish sentiment is reflected in the rising implied volatility of oil options and a surge in timespreads. Traders are bracing for further fluctuations as the market adjusts to evolving supply constraints.

Russian Exports Under Pressure And Defiance

Recent weeks have seen signs of strain on Russian exports. Seaborne crude shipments from Russia are estimated to have dropped to their lowest levels since August 2023.

In response, Russia has condemned the sanctions as a “hostile” move designed to harm its economy and destabilize global markets. The Foreign Ministry affirmed its commitment to major oil and gas projects despite the pressure, framing the sanctions as an attempt to damage Russia’s economy as President Joe Biden’s term concludes.

Ukrainian President Volodymyr Zelensky welcomed the sanctions, emphasizing their potential to weaken Russia’s revenue streams and expedite peace efforts. “The less revenue Russia earns from oil, the sooner peace will be restored,” Zelensky said.

The Last Bit

As the sanctions reshape energy trade routes and fuel price volatility, the global oil market faces heightened uncertainty. With buyers pivoting to alternative suppliers and logistical challenges mounting, the sanctions’ long-term impact will depend on how effectively global producers can adapt to the evolving landscape.

As the global oil market reacts to these sweeping sanctions, China and India must seek alternatives with Middle Eastern and American oil becoming increasingly crucial to their energy security.

The sanctions reflect a broader effort by Western nations to isolate Russia economically. However, the effectiveness of these measures will depend on the ability of other nations to adapt and the Kremlin’s resilience in finding new trade partners or leveraging its shadow fleet.
With energy security emerging as a critical concern, the global oil market faces a turbulent road ahead. For now, the sanctions mark a turning point in the ongoing battle to curb Russia’s economic lifelines.