On 23rd Oct, the US Treasury Department sanctioned two Russian oil giants Rosneft PJSC and Lukoil PJSC as well as all entities in which they hold a direct or indirect stake of 50% or more, for operating in Russia’s energy sector. As a result, all US or US-based entities and individuals are barred from transacting with the sanctioned entities. Non-US ones may also be at risk of being penalized if found to be dealing with Rosneft, Lukoil or their sanctioned subsidiaries. Transactions involving the two firms need to be wound down by Nov. 21. So we decided to look at hard data on supply from these two entities. Currently there is 3.0mb/d of YTD Rosneft-Lukoil YTD exports (1.7mb/d from Rosneft seaborne exports, 0.8mb/d from Lukoil seaborne exports, and 0.5mb/d for oil via pipelines). But we believe the potential hit is likely to be smaller than the 3 mbpd for following reasons: 1) Exemptions for importers via licenses 2) Ongoing purchases of (discounted) Russian barrels 3) Reorganization of trade networks 4) Higher core OPEC production. We believe that these new sanctions are likely to result in narrower profit margins for Russian crude exporting entiites, as increased logistical and payment complexities may reduce profitability and prompt Russian producers to offer deeper discounts on their products. But overall export flows might not be impacted more than 0.5-1 mbpd. By destination, combined Rosneft and Lukoil year-to-date (YTD) estimated exports stand at 0.7mb/d for China, 1.2mb/d for India, 0.4mb/d for Turkey, and 0.8mb/d for other importers. In this we assume only India goes down by .4mb/d where as China remains the same. Hence the current 1.5 mbpd disruption factored in by Brent is more fear than reality. In September, exports from “other” Russian suppliers to India totalled about 260 kbd out of a total 1.6 mbd; these flows from alternative or unknown suppliers could expand to roughly 1.0 mbd as intermediaries step in, while 0.2–0.3 mbd may continue to be imported directly from sanctioned companies. However, the remaining 0.4 mbd may no longer be available to the Indian market. Given time, Russia has the capacity to potentially divert 0.8 mbd of its seaborne exports to countries like Egypt, Malaysia, Vietnam, Brunei, and South Africa. China’s blending capacity could absorb an additional 1 mbd of Russian crude. And then we have OPEC spare capacity of 3 mbpd. Hence The potential reduction in purchases of Russian oil may be temporary if progress towards a peace process to end the war in Ukraine were to be made and/or if energy affordability were to rank higher on Western policymakers’ priority list. For political reasons too, President Trump’s inferred preference for WTI oil is around $40-50/bbl seen by his previous public comments. With affordability issues at the centre of 2026 US mid-term elections, we don’t believe Trump is going to tolerate the recent rise in crude prices. In addition, in recent past, he has said that he does not like using crude sanctions because it shifts the global trade away from USD which he does not like. So unless Putin is thinking of enlarging the war theater, Trump will soon find an exit route for his new sanctions on Rosneft & Lukoil. Even if we are wrong on all our assumptions above, Putin might see the cost of these sanctions and accept a ceasefire along current war lines. That situation again supports our view of Brent returning to 60$ levels sooner than later. We will be proved wrong if Brent sustains above 70$ levels on a weekly closing basis. But by then we believe TACO will already be in play. Hence the current rally in Brent prices are a golden opportunity for oil producers to hedge.
