President Donald Trump could further tighten sanctions on Russia’s oil sector, as an expected global oil surplus next year protects American motorists from price shocks while leaving room for the United States to tighten sanctions.
The Treasury Department on Wednesday announced sanctions on Russia’s two largest oil exporters, Rosneft and Lukoil, citing the Kremlin’s “failure to seriously engage in the peace process to end the war in Ukraine.”
Helima Croft, head of global product strategy at RBC Capital Markets, told clients the sanctions were “the most significant action yet by the United States to shut down Russia’s war ATMs.”
The sanctions took the oil market by surprise. U.S. crude oil prices soared nearly 6% to trade above $60 a barrel as many traders downplayed the risk of higher prices from President Donald Trump’s focus on keeping energy prices low.
Benchmark West Texas Intermediate U.S. crude oil prices hit a five-month low on Monday, dropping nearly 14% since the start of the year. The market is under pressure as OPEC+ production increases and trade tensions between the US and China flare up, raising concerns about a global economic slowdown.
Bob McNally, president of Rapidan Energy and a former energy adviser to President George W. Bush, said the drop in oil prices has given President Trump room to act against Russia while protecting American motorists. Croft said the White House likely saw this as an opportunity to attack Moscow, since there was still a year until the U.S. midterm elections.
“It’s about protecting American drivers while damaging the Russian Treasury,” McNally said.
Escalation is imminent
Mr. McNally said President Trump’s sanctions, which take full effect Nov. 21, are likely intended to force Russia to sell its oil at a deeper discount to the global benchmark Brent crude, rather than immediately targeting Russian export volumes. That would reduce Russia’s oil revenue while avoiding price hikes that would put a strain on Americans’ pockets, he said.
But the oil market faces an impending surplus in 2026, according to a former Bush adviser, which would give President Trump more room to further tighten sanctions against Russia next year by directly targeting export volumes to Russia.
This would also have the added benefit of supporting U.S. shale oil producers who are under pressure from low prices, McNally said. U.S. shale company executives have strongly criticized President Trump’s push to lower oil prices in anonymous responses to a quarterly survey conducted by the Dallas Fed.
“We can afford to do that because oil prices aren’t going to hit $100 next year. If anything, we’ll see oil prices fall to $20 a barrel and help shale disappear,” McNally said.
“Next year, someone, whether it’s OPEC, Russia, Iran or shale, will have to make significant production cuts,” he said. “You take your pick. The president doesn’t want shale to lose 2 million barrels a day like it did in 2020. He may want $40 oil, but he doesn’t want $20 oil.”
Immediate impact on the market
McNally said oil markets may be close to pricing in sanctions after the announcement caught traders by surprise. What happens to prices going forward will depend on how the measures are implemented. The analyst said U.S. oil prices could return to the $50s if sanctions are leniently enforced, but there is also a risk that prices could rise if the administration takes a tough stance.
Lukoil and Rosneft account for more than half of Russia’s exports of more than 5 million barrels per day, according to data provided by Kpler. Trump’s sanctions come after former President Joe Biden imposed sanctions on Russia’s third and fourth largest producers, Gazprom Neft and Surgutneftegaz, in January.
India remained the biggest buyer of Russian crude in September, followed by China and Turkey, according to Kpler data. President Trump is pressuring India with tariffs to stop importing Russian crude oil.
“Refiners in India, China and Turkey will conduct internal risk assessments of their transactions with sanctioned Russian companies while awaiting clarification from their governments,” Kpler oil analyst Matt Smith said in a note to clients.
This could result in the oil being resold at a deep discount to “refiners willing to take risks, such as entities that are already under sanctions,” or to small independent private refineries in China, Smith said. “However, major disruptions to Russian oil exports seem unlikely,” he said.
