US sanctions vs. Russian crude: A catch-22 situation

The goal of the G7 price cap is to reduce Russia’s revenues despite keeping its oil flowing to global markets. The recent sanctions on Russia-linked vessels will tighten vessel availability for its crude exports. India, which has emerged as a main buyer of Russian crude after the implementation of the G7 price cap, would continue its imports provided it is sold below $60 per barrel on non-sanctioned vessels. 

With reports of crude barrels stuck awaiting delivery to traditional partners, such as India, the seaborne Russian trade has been hampered. Some markets are re-evaluating imports due to the US sanctions, affecting both crude prices and trade relations. Considering the importance of Russia in global oil supply, any significant decline in Russian crude exports will tighten the oil market, underpinning crude prices. In order to avoid this situation, we have analysed different trade scenarios which could be desirable for the trade.

The first scenario for the uninterrupted flow of Russian crude into the market is the country’s adherence to the price cap because of which its trade could benefit from maritime services such as shipping, insurance and financing from the west. In such a scenario, Russian crude trade will increase the cargo availability for non-sanctioned vessels, especially when several of its tankers are already under sanctions. 

However, after numerous sanctions on vessels carrying Russian crude over the last six months, tanker owners and operators will be reluctant to carry this crude. The risk of possible US sanctions, underpinning freight rates and insurance costs for Russia crude trade will in turn render it unattractive for buyers. 

India, which emerged a significant buyer has been benefiting from lower prices after Europe banned Russian oil imports. The South Asian country imported about 1.66 mbpd of Russian oil in 2023 compared to 0.65 mbpd in 2022. The threat of losing a major buyer like India might force Russia to absorb the higher transportation cost by offering a deeper discount on crude prices. 

The second possible scenario is that Russia explores alternative means of selling its oil, leading it to rely on the ’shadow fleet’ of aging tankers. These vessels were not extensively engaged to transport Russian oil to consumers previously due to high freight costs. As India is reluctant to buy crude on sanctioned vessels, Russia is unlikely to use dark vessels to supply crude to India. Nonetheless, if it manages to find buyers for its crude above the price cap, the demand for the ‘shadow fleet’ will increase at the expense of non-sanctioned vessels, hurting tonnage demand in the crude tanker market.    

Western nations, particularly the G7, are actively working to compel the international community to enforce the price cap and address the issue of the ‘shadow fleet’ to tighten the grip on Russia’s energy revenue. As the geopolitical landscape continues to evolve, the impact of sanctions on Sovcomflot and the tanker shipping industry becomes evident. 

Tanker operators face challenges but also potential opportunities as they navigate through the complexities of the sanctions and the evolving energy landscape. Drewry believes Russian crude trade will continue unabated at discounted prices as the ongoing sanctions will make it difficult for Russia to evade the price cap. The crude tanker market will thus benefit from the Russian crude trade on vessels without any sanctions.