Oil Markets on Edge as Sanctions Against Lukoil, Rosneft Kick In
U.S. sanctions on Lukoil and Rosneft entered into force on Friday, potentially reducing Russia’s ability to export crude oil and refined products into global markets even further.
On Oct. 22, the U.S. Treasury announced that it would sanction the two largest oil companies in Russia in order to pressure the Kremlin into ending the war in Ukraine. The decision included a one-month grace period, meaning that from Nov. 21 any company doing business with Lukoil and Rosneft is at risk of secondary U.S. penalties.
Lukoil and Rosneft account for a significant share of Russia’s oil. Collectively, it is estimated that the two companies export around 3.0 million b/d, mostly to China, India and Turkey.
It is far from clear how buyers in those countries will react, particularly in China. Previous U.S. sanctions on Russia’s Surgutneftegas and Gazprom Neft did not materially impact volumes, as companies used intermediaries to trade.
But India’s Reliance has already said that it will abide by the sanctions against Moscow and find alternative supplies. Moreover, the EU is banning the import of products based on Russian crude from Jan. 21, putting even more pressure on Turkish and Indian refiners to switch to feedstock from other countries.
“The market is still struggling to comprehend the short- and medium-term impact on Russian oil exports. Valuable data points will emerge in the coming weeks as we see where the sanctioned barrels are ending up and the U.S.’ willingness to
enforce the sanctions,” Helge-Andre Martinsen from DNB Carnegie said.
With crude in ample supply at the moment, Russia’s buyers shouldn’t have too much trouble sourcing supplies from elsewhere. However, the same is not true for the diesel market, where the latest sanctions come on top of an ongoing reduction in Russia’s production and exports due to constant Ukrainian drone attacks.
“The stars are aligning for a perfect storm as the combination of reduced Russian refinery capacity and the latest U.S. & EU sanctions have sharply cut the availability of Russian diesel on the global market,” said Arctic Securities analyst Ole-Rikard Hammer.
Russia has exported an average of 920,000 b/d of diesel so far this year, mostly to Turkey, Brazil and North Africa. With Rosneft and Lukoil accounting for up to 350,000 b/d of those exports, according to Morgan Stanley estimates, traders have started worrying that the tightness in the diesel market is about to become worse.
According to OPIS pricing data, the diesel crack versus Brent in Northwest Europe (NWE) has averaged almost $37/barrel since the U.S. sanctioned Lukoil and Rosneft. This compares with $26/bbl during the immediately prior rolling month, and $17/bbl during the same weeks of 2024.
Morgan Stanley believes that Turkey and Brazil will cut their imports of Russian diesel by up to 200,000 b/d as a result of these sanctions, potentially reducing global supply by 2%. No other buyer will be able to emerge as a replacement, because India and China are net diesel exporters.
As a result, the bank forecasts that the diesel crack in NWE will remain supported above $27/bbl at least over the next six months. Any material disruption on Lukoil’s refineries in Europe would lift prices even further.
–Reporting by Jaime Llinares Taboada, jllinares@opisnet.com; Editing by Yazdi Merchant, ymerchant@opisnet.com