Sanctions Bite, Drive Cost of Russian Oil Shipments Soaring

The trade of Russian oil for March-loading in Asia has slowed significantly as a growing gap between buyer and seller expectations in China has emerged. This disconnect comes amid rising costs for chartering non-sanctioned tankers following new U.S. sanctions, according to traders and shipping data.

Fresh sanctions imposed by Washington on January 10 targeting Russia's oil supply chain have caused tanker freight rates to surge. Many buyers and ports in China and India are avoiding ships affected by the sanctions, further complicating trade.

Offers for Russian ESPO Blend crude—exported from the Pacific port of Kozmino—have jumped to premiums of $3-$5 per barrel over ICE Brent on a delivered ex-ship (DES) basis to China. This increase follows a dramatic rise in Aframax tanker freight rates, which have surged by millions of dollars, according to three traders familiar with the market.

Impact of Sanctions on Pricing and Demand

Before the January sanctions, strong winter demand and higher prices for competing Iranian grades had pushed spot premiums for ESPO Blend crude in China to nearly $2 per barrel. This marked a significant recovery from the discounts of up to $6 per barrel seen after the Ukraine war began in 2022.

In India, demand has also been affected. Bharat Petroleum Corp Ltd’s finance chief recently stated that the company has not received the usual offers for March deliveries and expects fewer cargoes compared to January and December. Typically, India receives offers for Russian crude by mid-month, but these have dwindled.

Russian crude accounted for 36% of India’s imports and nearly 20% of China’s imports in 2024, underscoring the importance of these markets for Russia’s oil exports.

Challenges with Sanctioned Tankers

The new sanctions primarily target tankers carrying around 42% of Russia's seaborne oil exports, with China and India being key destinations. While some sanctioned tankers are discharging oil during a waiver period, logistical challenges remain. India’s oil secretary Pankaj Jain clarified that tankers loaded with Russian oil must discharge by February 27, with payments cleared by March 12.

In China, delays are mounting. Newly sanctioned tankers face obstacles offloading oil even when waiver requirements are met. Data shows that tankers such as Huihai Pacific and Viktor Titov, carrying ESPO and Sokol crude, have been waiting weeks to discharge at ports like Tianjin and Qingdao. Meanwhile, India has seen nine newly sanctioned tankers discharge oil since January 10, with additional shipments of Urals crude en route.

Supply Chain Disruptions

Sanctions and a ban by China’s Shandong Port Group are expected to significantly impact supply. According to consultancy FGE, refineries in Shandong Province could lose up to 1 million barrels per day (bpd) of crude supply in the near term. Independent refiners are already cutting operations, with run cuts expected to reach 400,000 bpd by February due to higher costs for alternative supplies.

China’s imports of Russian Far East crude fell to a six-month low of 717,000 bpd last week, and analysts anticipate subdued import levels in the coming weeks. India, meanwhile, faces potential disruptions to 450,000 bpd of Russian crude supply. Indian refiners have started seeking alternative sources from the Middle East, Africa, and the U.S. for March and April to compensate for the tightening Russian supply.

Long-Term Implications

While both China and India continue to navigate the challenges posed by sanctions, the broader implications for global oil markets are becoming clear. Rising costs, logistical delays, and reduced Russian oil supplies are reshaping trade patterns, pushing refiners to explore more expensive alternatives. As the sanctions waiver period ends and new restrictions take full effect, further disruptions in Russian oil exports to Asia appear inevitable.