The Biden administration imposed the harshest ever oil sanctions ever on Russia on January 10, which immediately roiled the international energy markets. Russia’s major oil producers, insurance companies and 183 members of its shadow fleet were placed on the Specially Designated Nationals and Blocked Persons (SDN) Lists in an effort to “significantly reduce Russia’s oil revenues.

Ukraine’s supporters have been calling for these tougher oil sanctions for all of the three years of the war, but the White House has held off until US President Joe Biden’s last week in office for fear of causing a spike in oil prices.

As bne IntelliNews reported, Western oil sanctions have largely failed and experts believe even these latest sanctions will not reduce the Kremlin’s oil tax take, but they will cause significant disruptions, drive up transaction cost and widen the discount Russia has to offer on its crude prices that will hurt the Russian economy.

Despite the existing regime, Russia’s oil taxes jumped by a third in 2024 to RUB9.19 trillion ($89.4bn), which made up a quarter of its income and almost entirely covered the defence spending on its own.

The new oil sanctions have sent shock waves through the global market that have been exacerbated by an attempt by Kyiv to destroy Russia’s last remaining gas pipeline to Europe, TurkStream, on January 13, and the first gas sanctions that may be included in the sixteenth sanctions package due to be introduced on the third anniversary of the start of the war in Ukraine on February 24.

Prices soar

Oil prices eased on January 14 but remained near four-month highs as the impact of the US’ harsh January oil sanctions on Russia hit the market. Brent oil rose to $80.73 as of January 14 from an average of $70 in December.

Supertanker freight rates also jumped following the announcement after the US expanded sanctions on Russian oil trade. Traders rushed to book ships to pick up supplies from other countries to go to China and India before the sanctions kick in in March, Bloomberg reports.

Russia has already been paying a premium to book international oil tankers due to sanctions, but those costs will only increase now, marginally decreasing profits, but that will be offset by the accompanying rise in oil prices as a result of the sanctions.

Chinese and Indian refiners are already hunting for alternative fuel supplies as they adapt to the new sanctions regime on Russian producers and tankers.

Sanctions could take 700,000-800,000 barrels per day (bpd) of Russian crude off market out of the total of 5mn barrels that Russia exported in 2024, analysts say. However, with an estimated 2mn barrels oversupply expected this year, removing this amount of Russian oil from the market is not expected to push up prices dramatically.

Of the 183 tankers targeted in the new sanctions, most are a part of Russia’s shadow fleet that is made up of some 400 vessels, although other estimates put the total as high as 800 tankers, if freelancers are included.

Freight rates for Very Large Crude Carriers (VLCCs) that can carry 2mn barrels of crude jumped after Unipec, the trading arm of Asia's largest refiner Sinopec , chartered several supertankers on January 10, Reuters reports. On a daily basis, the rate on the Middle East to China route, known as TD3C, has surged 39% since the sanctions announcement to $37,800, the highest since October, a shipbroker told Reuters.

At the same time, shipping on Russia’s east coast, which is outside the European sanctions reach, have also soared. The freight rates for Aframax-size tankers to ship ESPO blend crude from Russia's Pacific port of Kozmino to North China more than doubled on January 13 to $3.5mn as shipowners requested massive premiums due to limited tonnages available for that route, according to S&P Global Commodity Insights data, Reuters reports.

The rate for VLCCs from the Middle East to Singapore has gained the most, up worldscale (WS) 11.15 on January 10 to WS61.35 on January 14 – an industry tool to calculate freight charges, Reuters said.

Tightening the oil price cap noose

The sanctions will have a knock-on effect on Russia’s biggest customers, with India expecting disruptions to supply in the short term when the sanctions come into effect at the start of March, but China seeing bigger problems in the medium term, say analysts.

India has halted negotiations for March supplies of Russian oil and is looking for alternatives, according to the report.

Demand from Russia’s other major buyer China is also uncertain and could blunt the impact of the tighter supply. China's crude oil imports fell in 2024 for the first time in two decades outside of the COVID-19 pandemic, official data show.

Six EU countries called for the G7 to tighten the noose around Russia’s neck and further lower the oil price cap from $60 per barrel. Some have suggested the bar should be dropped to $40 to cut Russia’s income.

"Measures that target revenues from the export of oil are crucial since they reduce Russia's single most important income source," Sweden, Denmark, Finland, Latvia, Lithuania and Estonia said in a letter to the EU executive arm, Reuters reports.

The twin price cap sanctions on crude and refined products were introduced on December 5, 2022 and February 5, 2023 respectively. As the market is already oversupplied with oil, that has given the West more wiggle room to impose even tighter sanctions on Russian exports and so easier to avoid a repeat of the price shock that roiled markets in 2022.

"The international oil market is better supplied today than in 2022, reducing the risk a lower price cap will cause a supply shock," the letter of the six countries said. "In view of limited storage capacity and its outsized dependence on energy exports for revenue Russia has no alternative to continue oil exports even at a substantially lower price," the letter said.

 

Russian gas exports also in the firing line

Gas is also in the firing line. Ten EU member states also called for the first sanctions to be imposed on Russian LNG exports. Currently the West has imposed no sanctions on Russian gas and the EU remains dependent on imports to meet its winter heating needs. The EU is preparing its sixteenth package of Russian sanctions ahead of the third anniversary of Moscow's full-scale invasion of Ukraine in February 2022.

The ten countries – including the Czechia, Denmark, Estonia, Ireland, Latvia, Lithuania, Poland, Romania, Sweden and Finland – want Europe to end Russian gas imports, in any form, completely, in order to end revenues paid by Europe to Russia completely. Moscow has earned an estimated €92.3bn between the onset of the conflict and November 3, 2024, Statista reports. But banning Russian imports of gas will be hard as Europe remains hooked on Russian gas. Spain, France and Belgium continue to be the main partners, accepting Russian LNG shipments.

"As an end goal, it is necessary to ban the import of Russian gas and LNG at the earliest date possible," the countries said in a joint paper seen by Reuters.

Ukraine ended gas transit to Europe from Russia on January 1, but attempted to destroy the remaining transit pipeline, TurkStream, and end Russian exports of gas to the EU completely.

Ukraine sent nine drones to attack the TurkStream pipeline on January 13 that attempted to blow up one of the pipeline’s compressor stations in the Krasnodar region of southern Russia. Russia’s Defence Ministry said all nine drones were shot down without reaching their target. Kremlin spokesman Dmitry Peskov called it an "act of energy terrorism".

He said Russian Foreign Minister Sergei Lavrov and Gazprom CEO Alexei Miller had discussed the alleged incident with their Turkish counterparts.

Gas exports via pipelines from Russia to Europe in 2024 increased by 14% to 32.1bn cubic metres, according to data from Gazprom and the European Network of Gas Transmission System Operators (ENTSOG), reports Vedomosti.

The main growth in 2024 came from supplies via the Turkish Stream gas pipeline and its extension through the Balkans which jumped to the number one transit route after Ukraine ended transits in January. TurkStream flows grew by 23% to 16.7 bcm – above its design capacity of 15 bcm. The average daily volume of gas supplies to the EU via Turkish Stream last month was 49.2mn cubic metres.

The pipeline consists of two strands with a design capacity of 15.75 bcm per year (about 43.2 mcm per day) each. One of them supplies gas to Turkey, the other to Bulgaria and further to the countries of Southeastern Europe.

Deliveries into Europe via the European string of TurkStream at the Strandzha 2 entry point on the Turkey-Bulgaria border totalled 15.5 bcm in 2024, up by 22% year on year, reports S&P Global. The main customers of this route are Hungary and Serbia. Total Russian gas exports to Hungary in 2023 exceeded 5.5 bcm and were expected to reach almost 7 bcm in 2024. Russia is currently in talks with Serbia to renew its existing gas deal which expires in March. The last contract for Serbia was agreed in May 2022 for the delivery of 2.2 bcm per year at 100% oil-indexed prices.

Russian gas via TurkStream can also be delivered to Romania, Greece, North Macedonia, and Bosnia and Herzegovina.

Supplies to the EU and Moldova in transit through the Gas Transmission System Operator of Ukraine (GTSOU) of Ukraine in 2024 amounted to 15.4 bcm, which is 6% more than a year earlier.

Bulgaria's Bulgargaz was cut off from Russian gas supplies in April 2022, but Energy Minister Vladimir Malinov said in May last year that there had been a return of Russian gas to Bulgaria through "intermediary" companies, S&P Global reports.

Gas market to tighten

The moves to impose sanctions on Russian gas exports and the nerves following the attack on TurkStream threaten to cause a tighter global gas market this year, as well as driving up prices in energy-hungry Europe. For the first time since the war in Ukraine started three years ago, Europe faces the possibility of missing its targets for refilling its gas storage tanks before the start of the next winter.

While Europe has enough gas reserves to get through this winter and prices have eased since the start of the year, inventories are being eroded by cold weather. Gas withdrawals from the tanks are already running ahead of their previous five-year average and the EU is on track to end the heating season with tanks only 35% full – well down on the 60% full they ended the last season with. That means importing more gas to refill the tanks in 2025 than was needed in 2024.

“There will certainly be an energy gap in Europe this year,” Francisco Blanch, commodity strategist at Bank of America Corporate told Bloomberg. “That means that all the incremental LNG that’s coming online this year around the world will go into making up for that shortfall in Russian gas.”

To make up the shortfall, Europe needs to import an extra 10mn tonnes of LNG in 2025, or about 10% more than imported in 2024. And shortfalls in European gas supply are forecast to persist through to 2027 at least. That will put Europe into increased competition with Asia, the world’s biggest consumer of LNG, that will press prices upwards.

Gas futures in Europe, which typically also have an impact on Asian spot LNG prices, are still about 45% higher than at the same period last year at circa $550 per thousand cubic metres, and triple pre-crisis levels so far in 2025. The LNG market is still relatively youthful, and supplies of LNG are limited, although both the US and Qatar have plans to bring new production online in the coming years.

Global warming is making supplies worse as record high temperatures are driving up demand for power during the summer heat and reducing the surplus gas production available for storage before the heating season starts; 2024 was hottest year in documented history and first ever to see every month above the 1.5C Paris Agreement upper limit. Countries such as Brazil, Egypt and Germany are all exposed to climbing LNG prices due these problems.