On Tuesday, the administration of former President Donald Trump announced sanctions targeting two major Russian oil companies, state-run Rosneft PJSC and privately-owned Lukoil PJSC. The sanctions were implemented due to Moscow’s “lack of commitment to peace in Ukraine.”
These two companies account for nearly half of Russia’s total oil exports and are significant contributors to the federal budget, with the oil and gas sector representing about 25% of national revenue.
Analysts note that these measures signify a substantial shift in Washington’s policy towards Russia, which previously favored maintaining energy market stability through the G7’s oil price cap mechanism.
Market reactions to the sanctions were swift. Immediately following the announcement, Brent crude oil prices surged by over 3%, reaching beyond the $64 per barrel mark, while West Texas Intermediate (WTI) approached $60 per barrel. Major refineries in India are anticipated to drastically reduce their imports of Russian oil, exacerbating supply shortages in the market.
Warren Patterson, the head of commodity strategy at ING Group in Singapore, remarked, “This is a turning point in Trump’s policy. However, there remain doubts about the actual effectiveness and long-term impact on Russian exports.”
In response to Washington’s actions, the European Union has also agreed on a new sanctions package, which is expected to be approved this week. This package targets 45 organizations that support Russia in circumventing sanctions, including 12 companies from China and Hong Kong.
Simultaneously, Trump indicated he would discuss with Chinese President Xi Jinping the potential for Beijing to continue purchasing Russian oil at the upcoming summit in South Korea next week.
On the Indian front, Prime Minister Narendra Modi is reportedly committed to gradually decreasing Russia’s oil imports, though New Delhi remains heavily reliant on this supply.
However, Rachel Ziemba from the Center for a New American Security (CNAS) cautioned, “While China and India may reduce their purchases, they cannot entirely cease. Russia still has numerous underground financial channels to maintain its exports.”
The newly imposed sanctions are considered a shock to the already sensitive energy market. Just prior to this development, Brent crude had dropped to its lowest levels in five months, driven by oversupply and concerns regarding a global economic downturn. The announcements from the U.S. quickly reversed market trends, with analyst Vandana Hari from Vanda Insights stating, “Investors will need time to digest the implications of these bans, but it is clearly bad news for refineries in India and China.”
Additionally, U.S. crude oil inventories have declined, further bolstering the upward pricing momentum. Nevertheless, experts warn that these fluctuations may only be temporary as the world continues to face the risk of oversupply in the coming months.