Earlier this week, the Financial Times reported Denmark was considering the start of inspections and potential blocks of Russian oil tankers carrying crude across its waters in the EU’s latest attempt to enforce a price cap on oil exports from Russia. Also this week, The White House energy security adviser, Amos Hochstein, told Bloomberg the U.S. federal government was going to tighten the sanction noose around Iran, targeting its oil industry more closely.
The aim was to remove about 1 million bpd of Iranian oil exports, Hochstein said, but without disturbing prices. Oil prices have weakened recently, mostly on the back of equally weak economic data from the two largest markets for oil—the United States and China. This is good for both the U.S. and the EU but talk about more oil sanctions and their enforcement night just change that.
To be fair, a day after the FT report about Denmark was published, EU sources told Reuters that Russian oil tankers will not be targets in the bloc’s plan for better enforcement of the $60 price cap that Western governments thought would achieve the twin—and mutually exclusive—purposes of keeping Russian oil flowing into global markets and reducing the country’s revenues from these exports.
In truth, enforcing the cap was easy when all oil prices were naturally lower, including Russia’s flagship Urals. But when prices started rising again, so did Russian oil prices. For months, the architects of the cap ignored the topic until earlier this month when the FT cited a senior EU official as saying that almost no Russian oil was actually sold below the cap. This state of affairs, the same official told the FT, was not going to be allowed to continue, and the EU was going to toughen up on the enforcement. The report about Denmark’s inspection and block plans came out a day later.
While the EU debated how to approach this tougher enforcement, the U.S. acted: the Treasury Department imposed sanctions on three Emirati shipping companies for transporting Russian oil sold at prices above $60 per barrel this week. “Shipping companies and vessels participating in the Russian oil trade while using price cap coalition service providers should fully understand that we will hold them accountable for compliance,” deputy Treasury secretary Wally Adeyemo said.
Tightened sanction control might mean lower Russia oil flows abroad. While this would be sure to reduce revenues from said exports, it would also, of course, reduce oil supply. It was perhaps this that discouraged the EU from going ahead with the Denmark plan: a third of Russian oil exports pass through the Baltic Sea and Danish waters. Cutting off this third would no doubt have a substantial effect on global benchmark prices.
Meanwhile, the U.S. is also targeting Iran’s oil industry in response to the country’s support for Hamas. It is interesting, however, that Hochstein said he thought “the best anecdote to revenues in Iran is keeping their exports at a lower level, but also to make sure prices are lower.” This certainly sounds like the perfect scenario from the perspective of the White House. Unfortunately, it also sounds like having your cake and eating it, too, similar to the G7’s price cap strategy for Russian oil.
Oil traders have shrugged off these reports, focusing instead on U.S. retail sales and Chinese refinery activity. The former fell for the first time in seven months in October and the latter slowed down, largely because refiners used up their fuel export quotas. Traders also appear to have focused on the EIA’s latest weekly inventory report that showed a build, apparently taking it to mean the chance of supply tightening anytime soon is remote. Based on the latest from the EU and the U.S., it is not that remote. Sanction enforcement against both Russia and Iran will effectively be a supply reduction move. And, if it ever comes to pass, it would come on top of already existing curbs.
Of course, it is questionable whether anything besides sanctioning a few shipping companies would in fact be attempted. As noted earlier, both the EU and the U.S. need lower oil prices, not higher. The EU is already struggling with its energy bill and the U.S. is trying to buy some oil for the strategic petroleum reserve after it pretty much drained it last year. If, however, the sanction enforcers decide to put their money where their mouths are, global oil supply could tighten considerably. Even taking between half and one million barrels daily of Iranian oil off the market would tighten supply considerably, ING analysts said in a note this week.
Offsetting this potential loss—without factoring any loss of supply from Russia, at that—would require more exports from Venezuela, where the Biden administration recently relaxed sanctions for this very purpose. It seems that sanctions and their enforcement have become more of an energy policy tool rather than a means for the punishment of so-called adversaries. The problem with that tool is that it has a double edge.”