Oil Market Skeptical of Russia Sanctions Impact
A key sanctions deadline is approaching, but the oil market is skeptical that Washington is committed to strict enforcement. U.S. Treasury Department sanctions on Rosneft and Lukoil enter into force on November 21, and buyers wary of secondary sanctions are shunning Russian crude and seeking alternatives. But as President Trump seeks a Ukraine peace deal, it is unclear that the White House is willing to impose secondary sanctions that could curtail Russian exports.
For the moment, Russia is under pressure. Large crude buyers in India, Turkey, and China plan to suspend purchases from Rosneft and Lukoil after this week. As expected, both private and state-owned refiners in India are exercising caution. Crude lifting at Russia’s Black Sea and Baltic Sea terminals has fallen in the past two weeks, although this is partly due to bad weather and attacks on the Sheskharis terminal that affected loadings at Novorossiysk. Thanks to looming sanctions, the Urals discount to Brent crude has widened. Bloomberg reported that Novorossiysk-loaded Urals crude fell below $37 per barrel on November 14. Due to lower prices, Russian revenue from crude oil and petroleum products already dropped by almost 15% in October over the previous year, according to the International Energy Agency.
Source: Argus Media. FOB = free on board. Argus North Sea Dated reflects a basket of five North Sea grades, plus WTI Midland crude assessed on a cost, insurance, and freight (CIF) basis to Rotterdam. Urals discount reflects an average of Primorsk and Novorossiysk FOB prices relative to North Sea Dated, FOB.
The Treasury Department is talking tough on sanctions enforcement. On November 17, the department noted that Russian oil is selling at multi-year lows and suggested the measures are “starving Putin’s war machine.” It also recently blocked a proposed acquisition of Lukoil’s international assets by Gunvor, citing the trading giant’s legacy relationships in the Russian energy sector. Various countries are puzzling over Treasury guidance advising that Lukoil international asset sales should not provide “a windfall to Lukoil.”
However, recent licenses and exemptions suggest a more nuanced reality. The Treasury Department issued a license that gave Lukoil until December 13 to sell its international assets. Treasury’s Office of Foreign Assets Control also authorized transactions involving Lukoil and Rosneft related to the Caspian Pipeline Consortium, Tengizchevroil, and Karachaganak, which include U.S. companies. With regard to Russian oil exports, the Trump administration also issued a one-year exemption from Rosneft and Lukoil-related sanctions to Hungary and Slovakia, as well as a license allowing transactions until April 29, 2026 with two Germany-based subsidiaries of Rosneft. These exemptions are not surprising, but they show the challenge associated with cutting off Russian crude supplies to captive inland refineries.
It remains unclear that near-term disruptions will lead to sustained pressure on Russian oil exports or the Russian economy. Buyers in India and elsewhere raced to offload Russian crude before the November 21 wind-down date. But front-month Brent crude oil closed below $64 per barrel on November 19, suggesting that the oil market does not anticipate much supply impact.
The market mood is striking because Washington is ratcheting up public pressure on Russia. President Trump offered support for a draft bill sponsored by Senators Lindsay Graham and Richard Blumenthal that would impose up to a 500% tariff on countries that import crude oil, petroleum products, or uranium from Russia. Despite attracting more than 80 Senate cosponsors—a rare instance of bipartisan agreement in Washington—the bill has been on the back burner for months as Ukraine peace talks continued. Many are skeptical that the United States could impose such astronomical tariffs on countries including allies and key trade partners, but the bill suggests that if Russia does not get serious about Ukraine negotiations, the Congressional hammer will follow. Trump’s endorsement raises the stakes, as noted by Senator Graham at a Center for Strategic and International Studies event on November 19.
Recent reports that White House special envoy Steve Witkoff is negotiating a Ukraine deal raise new uncertainties about the energy sanctions threat. Trump likely views Rosneft and Lukoil sanctions as a stick to force Russia to the negotiating table. Perhaps this is a moment for the putative peacemaker to show the United States is serious about squeezing the Russian economy. But for now, the prospect of a peace deal is a bearish factor for the oil market.
Ultimately, the market impact of these sanctions depends on enforcement. Does Treasury have the internal capacity and willingness to rigorously enforce these designations, and to zealously track the new shell companies and dodgy trading entities that will inevitably crop up? This is mostly a matter of political will. If the Trump administration is truly fed up with President Vladimir Putin’s prevarications, perhaps it will follow through and ensure that the toughest sanctions to date on Russian energy indeed have real teeth. If so, he will surprise a complacent oil market.
About the Author
Ben Cahill is Director for Energy Markets and Policy at the Center for Energy and Environmental Systems Analysis, University of Texas at Austin.
