As new U.S. sanctions on Russian producers and ships limit supply to Moscow's biggest clients, Chinese and Indian refiners will get more oil from the Middle East, Africa, and the Americas, raising prices and freight costs, according to traders and analysts.

Targeting the money Moscow has used to finance its war with Ukraine, the U.S. Treasury on Friday placed sanctions on Russian oil producers Gazprom Neft (SIBN.MM), opens new tab, and Surgutneftegas, along with 183 vessels that have transported Russian crude. As trade in Russian oil shifted from Europe to Asia in 2022 due to Western sanctions and a price cap imposed by the Group of Seven countries, several of the tankers have been utilized to transport oil to China and India. Oil from Iran, which is likewise subject to sanctions, has also been transported by certain tankers.

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The new restrictions will force Chinese independent refiners to reduce refining production going forward, which will have a significant negative impact on Russian oil shipments, according to two Chinese trade sources. Since they are not authorized to speak to the media, the sources chose not to be identified.

According to a note from Matt Wright, head freight analyst at Kpler, 143 of the recently sanctioned vessels are oil tankers that transported over 530 million barrels of Russian crude last year, or around 42% of the nation's total seaborne crude exports. He noted that the majority of these went to India, with roughly 300 million barrels going to China.

"These sanctions will significantly reduce the fleet of ships available to deliver crude from Russia in the short term, pushing freight rates higher," Wright stated. Over the previous 12 months, the approved ships transported about 900,000 barrels per day of Russian crude to China, according to a dealer located in Singapore.

He went on to say, "It's going to drop off a cliff," India's imports of Russian crude increased 4.5% year over year to 1.764 million barrels per day (36 percent) during the first 11 months of last year. Over the same time period, China's volume, including pipeline supplies, increased by 2% to 99.09 million metric tons (2.159 million bpd), or 20% of its total imports.

India purchases primarily Urals oil, while China imports primarily Russian ESPO Blend crude, which is sold beyond the price cap.
Emma Li, a Vortexa analyst, stated that if the restrictions were fully applied, Russian ESPO Blend crude exports would be stopped; however, this would rely on whether China recognized the penalties and whether U.S. President-elect Donald Trump relaxed the embargo.

According to the sources, the new restrictions will force China and India to return to the compliant oil market in order to look for more supply from the Americas, Africa, and the Middle East. According to them, spot prices for Middle Eastern, African, and Brazilian grades have already increased recently due to growing demand from China and India as supplies of Iranian and Russian oil have become more scarce and costly.

"Middle Eastern grades are already seeing price increases," an executive in the Indian oil refining industry stated. "The only choice left to us is to pursue Middle Eastern oil. We might also have to pursue American oil. The restrictions on Russian oil insurers will force Russia to lower the price of its crude below $60 per barrel, according to a second Indian refining source, allowing Moscow to keep using tankers and Western insurance.

"Indian refiners, the primary consumers of Russian crude, are unlikely to wait around to find out and will be rushing to find alternatives in Middle Eastern and Dated-Brent related Atlantic Basin crude," stated Harry Tchilinguirian, head of research at Onyx Capital Group. "Strength in the Dubai benchmark can only rise from here as we are likely to see aggressive bidding for February loading cargoes of the likes of Oman or Murban, leading to a tighter Brent/Dubai spread," he stated.

The Shandong Port Group in the eastern Chinese province banned sanctioned tankers from calling into its ports after the Biden administration identified more ships trading with Iranian crude last month, anticipating of harsher action anticipated from the incoming Trump administration. China, the primary purchaser of Iranian crude, would therefore likely maximize its offtake of Canadian crude from the Trans-Mountain pipeline (TMX) and switch to heavier Middle Eastern oil, according to See More....