US sanctions clamp down on Russian oil exports

‍The US Treasury today announced sweeping new sanctions targeting companies and vessels engaged in Russia’s oil production and exports. The sanctions include 183 vessels, of which 143 are tankers. The tankers included are a combination of Russian-owned and Shadow fleet vessels. The package of sanctions is the largest to target the Russian shipping market since the invasion in 2022.

Key Takeaways

• The latest sanctions have targeted tankers accounting for about 42% of Russia’s seaborne oil exports, primarily to China.
• Limited impact on Russian oil output seen for now, but we anticipate a decline of 150 kbd by late Q3. Crude exports should remain stable, however, as priority is given to crude over dirty products exports
• The higher associated freight costs will push Russian crude price differentials further up, approaching parity with non-sanctioned grades of similar quality
• Iranian oil shipments have encountered similar logistical challenges in recent weeks. Iran’s oil exports could decline to around 1 Mbd if the U.S. extends sanctions
• Russian primary runs will need to take a step back over the near term, seen settling close to the 5.2 Mbd mark over H1
• Lower supply will be feeding into constructive fundamentals for Atlantic Basin gasoil and fuel oil, as well as EoS naphtha and fuel oil markets
• Reduction in fleet supply from Russia will drive freight rates from Russia higher
• Increased demand for exports to India and China from outside Russia will increase non-sanctioned tanker demand driving, lifting Aframax and Suezmax rates primarily but support dirty tankers more broadly.

The U.S. Office of Foreign Assets Control (OFAC) enforces sanctions with an aggressive, extraterritorial approach characterized by a strict liability framework—violations occur regardless of intent. This sets OFAC apart from enforcement bodies like the UK’s OFSI, the EU, and the UN, which tend to operate jurisdictionally and are often less assertive. OFAC’s reach extends to any global transaction with a U.S. nexus, while the UK and EU largely focus on territorial compliance. OFAC’s stringent measures and significant penalties highlight its dominant role compared to its more localized and fragmented counterparts.

Russian crude

The latest OFAC sanctions targeted 117 crude oil tankers, with 102 of them transporting Russian crude to China and/or India at least once in 2024, and 11 exclusively moving Arctic crude from oil fields to export terminals within Russia. These newly sanctioned tankers handled over 530 Mbbls of Russian crude exports last year, accounting for about 42% of Russia's total seaborne crude exports. Over half of this volume—around 300 Mbbls—was shipped to China, making up roughly 61% of China’s seaborne imports of Russian oil. Meanwhile, the bulk of the remaining exports went to India, contributing to nearly a third of the South Asian nation’s total intake of Russian oil.

The swift sanctions aim to disrupt Russian oil exports, forcing sellers to seek alternative vessels to address the shipping shortfall—a challenge that will take time to resolve. Russian producers are expected to focus on securing non-sanctioned tankers to sustain crude flows, minimizing the impact on production. However, logistical hurdles could still reduce supply by approximately 150 kbd from late March onward. Despite this, crude exports are expected to remain resilient as Moscow prioritises crude shipments over product exports, such as fuel oil. We expect exports (as in volumes leaving Russian ports) to rebound to 3.3 Mbd by February, leading to a build of 10-15 Mbbls in floating storage by March, until the supply chain is reorganised.

Crude oil volumes transported by the latest sanctioned tankers in 2024, by route

Source: Kpler

When it comes to buyers, China and India, in general, tend to steer clear of dealing directly with tankers and entities blacklisted by the US Treasury. Just this week, China’s state-owned Shandong Port Group announced a ban on vessels listed under OFAC from docking at its facilities—a precautionary step to avoid potential liabilities as President-elect Donald Trump prepares to return to the White House in just two weeks. In 2024, nearly half of China's seaborne imports of Russian crude oil were sourced through Shandong.

The new sanctions disrupting Russian oil exports are expected to drive up Russian crude price differentials in China and India in the short term, potentially reaching parity with non-sanctioned grades of similar quality. ESPO prices have soared to their highest levels since November 2022, with a $2.1/bbl premium over ICE Brent on a DES Shandong basis, while Urals prices have also hit post-sanction peaks. In response, Chinese and Indian refiners have been increasing crude orders from suppliers such as the UAE, Oman, and Angola—a trend likely to persist in the short term amid fears of supply shortfalls. However, with Russian refinery runs expected to decline, the resulting higher availability of Russian crude in export markets could cap price increases in the medium-term, provided alternative shipping solutions are secured.

Selected crude differentials against ICE Brent on DES Shandong basis, $/bbl

Source: Argus Media

The latest sanctions on Russian crude are also expected to further support the differentials for Iranian oil in the short term, which have already reached a post-sanction high. Iran Light is currently offered at a $1.50/bbl discount to Brent in Shandong. However, we believe the price increase is approaching its limit. While there may be potential for an additional $1/bbl rise, this is likely constrained by the tight refining margins currently faced by China’s independent refiners.

Despite recent challenges in delivering crude to Chinese ports, Iran’s crude oil production and exports remained steady in Q4, averaging 3.3 Mbd and 1.7 Mbd, respectively. This production stability has also partly been supported by increased domestic demand for gasoil and fuel oil, primarily for power generation. However, imports into China have declined to 1.35 Mbd since November, resulting in a surge in floating storage to close to 20 Mbbls, particularly off the Malaysian coast.

While the current challenges surrounding Iranian oil shipments appear manageable in the medium term, the situation could worsen if the US expands sanctions to include most of the untargeted tankers during the Trump administration. Such measures would significantly complicate logistics and could reduce Iran’s oil exports to 1 Mbd in the short term. Higher freight costs and the increased risks associated with purchasing Iranian oil are likely to deter more buyers. As a result, lower differentials will be required in the medium term despite the likely reduced availability of Iranian crude to attract buyers.

Freight Market

The sanctions predominantly target crude tankers, including 80 Aframaxes and 22 Suezmaxes. Collectively, the tankers listed account for 25-30% of Russian crude and DPP export ton-miles in recent months.

Total Russian crude and DPP export ton-miles (Bn) and share from sanctioned ships

Source: Kpler

Although the EU, UN, or OFSI already sanction some of these ships, we expect their addition to the OFAC list to have a material impact on their trading behaviour. India has previously said it will not receive vessels sanctioned by the U.S., and this week, the Shandong port authority confirmed it would not allow US-sanctioned vessels to call at its ports.

As a result, these sanctions will significantly reduce the fleet of ships available to deliver crude from Russia in the short term, pushing freight rates higher.

Last year, over 430 tankers were involved in Russian crude exports, up from 260 in 2022. While the sanctioned ships trade almost exclusively with Russia, many others load from other countries. We expect an increased strain placed on these ships to help maintain exports, limiting their involvement in non-Russian exports. In addition, we expect new ships will be pulled into the shadow fleet over the coming months, many of which will be new to this trade, tightening supply in the non-sanctioned freight market.

As discussed above, China and India will turn to other suppliers in the Middle East and West Africa in the short term until new shipping solutions are found. This will further lift demand for non-sanctioned vessels. As a result, we expect Aframax and Suezmax rates to rise across load regions, which will lift VLCC rates. There is a limited direct impact on clean tankers, but we expect LR2 rates will begin to firm from the tighter Aframax market.

Refinery Operations and Products

Without enough vessels capable of carrying Russian dirty products, Russian refiners will be faced with a challenge to retain primary run rates, which will be particularly acute for the simple setups, constituting a little over 2 Mbd of primary capacity. Hence, as an immediate effect of the sanctions, we estimate that crude intake will need to take a step lower over the weeks ahead, hovering above the 5.3 Mbd mark in January (following a robust start to the year) and settling at 5.2 Mbd over February and the rest of H1, a drop of about 300 kbd vs our previous base case.

While Russia would attempt to offset these impacts through shadow fleets, market diversification, and increased domestic refining, the constraints on logistics and market access would weigh heavily on refinery economics, at least over the near term. Consequently, we see fuel oil and gasoil supply suffering the most, set to fall by 100 kbd and 80 kbd, respectively, with naphtha and gasoline supply also set to fall by about 50 kbd each, compared to our previous expectations.

For the most part, we see this playing in favour of the regional gasoil market in the West of Suez, which was already showing signs of tightening before the new set of sanctions, further supported by upcoming refinery closures in Europe over H1. At the same time, tightening HSFO balances will also help cracks this upcoming spring, benefiting from already tightening HSVGO supplies out of Russia amid workable hydrocracker unit margins. Up the barrel, the expected support in simple refinery margins will probably not bring back enough naphtha supply to fill the gap left by Russia (19% of global exports in 2024, or 430 kbd), providing structural support to delivered naphtha prices in Asia (the bulk of Russian deliveries), to attract barrels from the Med, USGC, and the Middle East. However, demand is likely to also fall by up to a similar amount, with buyers in Asia reliant on discounted Russian naphtha for their base chemical industry facing the reality of gross negative margins.

Russian crude intake (Mbd)

Source: Kpler

Risk and Compliance

Newly added vessels to the OFAC list have an average age of 16.8 years, with most (65 vessels) aged 16-20 years. Surprisingly, some newer vessels (0-5 years) also made the list, showing that compliance challenges span all vessel ages. Over 81% of these vessels are linked to restricted cargo, primarily Russian oil subject to the price cap. Similarly, 81.4% of sanctioned activities involve high-risk ship-to-ship (STS) transfers tied to sanctions via cargo, vessel, or ownership. 69.9% of these involve Russian cargo. 14.2% of these vessels engage in dark STS operations, where AIS tracking is turned off, detected only through satellite monitoring. 9.3% of the vessels visited high-risk ports in Iran, Venezuela, North Korea, or regions like occupied Ukraine and sanctioned Russian LNG projects.

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