The impending US oil sanctions on Russia will lead to a restructuring of the global supply of 7.4 million barrels per day.

The US government announced sanctions on two major Russian oil producers on October 22, shaking up the energy market. Currently, all eyes are on how global oil supply and prices will react after the sanctions take effect on November 21. According to data from the International Energy Agency, Russia's daily oil export volume is approximately 7.4 million barrels, accounting for about 7% of global crude oil and refined oil consumption. The latest sanctions against Russian oil companies Rosneft and Lukoil, in addition to earlier sanctions imposed this year, mean that most of the companies transporting Russian oil to overseas markets are now on the blacklist. India and China are currently the two largest buyers of Russian oil. As of October 24, the daily import volume of both countries is close to 3.6 million barrels. After Washington announced the sanctions, Indian refinery companies had initially stated that they would suspend most purchases, but so far, the volume has only decreased slightly and has not completely stopped. If India follows through on its commitment, Russia will have difficulty finding alternative buyers. It is currently unclear if China is willing to increase purchases - state-owned buyers in China have already canceled some orders. These sanctions may not apply enough immediate pressure on President Vladimir Putin to end the war in Ukraine. However, if India and China completely boycott Russian oil, it will undoubtedly intensify competition for oil from other oil-producing countries and drive up oil prices. The day after the announcement of sanctions, oil benchmark prices in the Middle East region spiked significantly, reflecting an increase in demand for crude oil in that region. What are the specific details of the new sanctions? The US Department of the Treasury sanctioned two Russian oil giants - Rosneft PJSC and Lukoil PJSC, as well as all entities in which these companies have a direct or indirect stake of 50% or more, for conducting business in the Russian energy sector. As a result, all entities and individuals within the US are prohibited from conducting transactions with sanctioned entities. Non-US entities found to be doing business with Rosneft, Lukoil, or their sanctioned subsidiaries may also face penalties. The Treasury Department stated that transactions involving these two companies must be gradually terminated by November 21. Previously, the Biden administration had already targeted two other Russian oil companies - Gazprom Neft PJSC and Surgutneftegas PJSC - with sanctions in January. Additionally, on October 23, the European Union announced it would prohibit trade with Russian oil companies and the Russian energy giant Gazprom Neft PJSC. Most oil buyers and traders in many regions worldwide may have no choice but to avoid dealing with these sanctioned entities - as much of global commerce relies on banks, trade, and insurance services operated by the US and EU. Why were new sanctions imposed? The Treasury Department stated that the imposition of sanctions is a response to Putin's refusal to halt the war in Ukraine. The core aim is to limit oil and gas-related tax revenues (which account for about a quarter of the Russian federal budget) and cut off Putin's sources of funding needed to sustain the conflict. Former President Donald Trump had promised to end the conflict within 24 hours if he returned to the White House, but despite multiple punitive measures imposed on Russia by the US, the conflict continues. These latest sanctions directly targeting the Russian oil industry mark a shift in the US policy towards Russia. What is the significance of additional sanctions? Previously, the US government largely avoided directly sanctioning Russian oil companies and had instead introduced a special price cap mechanism during the Biden administration. The aim of this mechanism is to limit Russia's energy revenues while avoiding major disruptions to global oil prices caused by a significant drop in Russian oil supplies. This price cap was introduced by the G7, EU, and Australia in 2022, setting the maximum price for Russian oil at $60 per barrel, and subsequently imposing price limits on refined oil products. If buyers exceed this cap, they would be unable to access critical services such as shipping, insurance, and financing provided by Western companies. Under EU sanctions regulations, most European countries are also prohibited from importing Russian seaborne crude oil (regardless of the price), although some Russian crude oil may still indirectly enter the European market in refined form through processing countries. Western countries have also imposed sanctions on third-country entities participating in Russian crude oil trade, resulting in hundreds of oil tankers and their shipowners and operators being penalized. Some foreign buyers and operators involved in this trade have been blacklisted, including Nayara Energy Ltd. in India (partially owned by a Russian oil company) and Shandong Yuhuang Petrochemical Company in China. However, despite initial declines in Russian oil exports in the weeks following sanctions, exports typically rebound as logistics providers adapt. A "shadow fleet" consisting primarily of aging tankers, supported by parallel banking and port infrastructure, is responsible for transporting Russian crude oil. Despite the price ceiling and multiple sanction measures in place, the two largest oil importing countries in the world, China and India, continue to purchase significant volumes of Russian seaborne crude oil, with a combined daily import volume of 2.8 million barrels. In addition, China imports around 800,000 barrels of Russian crude oil daily via pipelines. Currently, Russian seaborne crude oil exports have returned to levels seen over two years ago. In recent months, as oil prices have dropped, the EU and the UK have lowered their price caps on Russian oil, but the US has not followed suit, and the Trump administration did not use the price cap as a means of continued punishment. What impact will the new sanctions have on Russia? There are already indications that the sanctions are having an impact. Russian seaborne crude oil exports continue to decline, and coupled with the country's plummeting oil prices, the Kremlin's fiscal revenues have fallen to the lowest level in two and a half years, at around $1.2 billion per week. This latest measure increases the risk for any party in the Russian supply chain handling sanctioned entity oil. While Russian officials have not underestimated the impact of the sanctions, they have expressed confidence in finding ways to mitigate the effects. The ultimate outcome will largely depend on whether Indian refinery companies follow through on their initial expectations (significantly reducing import volumes) and whether other countries are hesitant to act as alternative buyers due to fears of sanctions. What impact will the sanctions have on India? India has reduced its purchases of Russian crude oil arriving in December. Most refinery companies in the country have also indicated that they will no longer accept Russian crude oil after the transition period ends. Remaining companies may consider purchasing from non-sanctioned sellers. Previously, the Trump administration had imposed punitive tariffs on India for purchasing Russian oil. Reducing imports of Russian oil may help push the US and India towards a trade agreement to lift these tariffs. Meanwhile, Reliance Industries Ltd. has announced that it will cease processing Russian oil at a portion of its Jamnagar refinery. The company stated in a release that the export-oriented portion of the refinery, comprising about half of its production capacity of 1.4 million barrels per day, received its last shipment of Russian crude oil on November 20.