Oil Glut Enabled Tougher Sanctions, JPM Says

In a report sent to Rigzone on Friday by Natasha Kaneva, head of global commodities strategy at J.P. Morgan, analysts at the company, including Kaneva, highlighted that the “oil glut enable[d]… tougher sanctions”.

“WTI [West Texas Intermediate] prices falling into the $50s created an opportunity for the Trump administration to step up economic measures against Russia and pursue a more assertive approach to sanctions,” the J.P. Morgan analysts said in the report.

“Mirroring last week’s action by the UK, the U.S. announced on Wednesday sanctions against Russia’s largest oil producers, blacklisting state-run Rosneft and privately held Lukoil, as well as their subsidiaries,” they added.

“Until now, the U.S. has refrained from sanctioning Russia’s leading oil producers, viewing it as a ‘nuclear option’ due to concerns that their size could trigger a spike in oil prices and destabilize global energy markets,” they continued.

In the report, the J.P. Morgan analysts noted that flows at risk are material.

“Together, these two companies account for nearly half of Russia’s crude production and a similar share of its exports,” they said.

“With Wednesday’s announcement, all four of Russia’s largest oil companies – Rosneft, Lukoil, Gazprom Neft, and Surgutneftegas – are now subject to U.S. curbs, following earlier measures imposed on Gazprom Neft and Surgutneftegas by the Biden administration in January,” they added.

“In effect, 70 percent of Russia’s 2024 production and exports are now under sanctions. Transactions involving Rosneft and Lukoil must be wound down by November 21. In a coordinated move, the EU also unveiled its 19th package of sanctions, further targeting Russia’s energy revenues,” they continued.

The analysts went on to state in the report that the effectiveness of these measures will depend on three key factors, “how well they are enforced; the response of major players in India and China; and Russia’s ability to circumvent the sanctions, as it has done in the past”.

“Overall, sanctions are likely to result in stable Russian export flows but narrower profit margins, as increased logistical and payment complexities may reduce profitability and prompt Russian producers to offer deeper discounts on their products,” the J.P. Morgan analysts stated.

In a research note sent to Rigzone by the HSBC team on Friday, HSBC Senior Global Oil & Gas Analyst Kim Fustier outlined that the new U.S. sanctions on Rosneft and Lukoil “represents a meaningful step-up in U.S. pressure on Russia and is the biggest set of Western sanctions since late 2022”.

“We think the new U.S. sanctions coupled with the EU’s 18th and 19th sanctions packages could lead to net supply losses from Russia of several hundred thousand barrels per day, though it is too early to quantify them,” Fustier added.

In a separate research note sent to Rigzone by the Saxo Bank team on Friday, Ole S. Hansen, Saxo Bank’s Head of Commodity Strategy, stated that “a week ago, the dominant narrative in oil was oversupply”.

“Tankers at sea had reached pandemic-era highs, physical differentials were soft, and front-month Brent traded near key support at $60,” he added.

“However, what started as a small recovery after traders started to question the prevailing supply-glut narrative, as movements in the Brent and WTI forward curves remain far from levels that would typically reflect such an imbalance, turned into a short-covering led rally after Washington announced sanctions targeting Russia’s main exporters,” he continued.

“The move, aimed at cutting Moscow’s war funding, disrupted flows that had quietly sustained Russian output despite the broader Western embargo,” Hansen said.

Rigzone has contacted the White House, the Department of Information and Press of the Russian Ministry of Foreign Affairs, Lukoil, and Rosneft for comment on the JPM report and the research notes from HSBC and Saxo. At the time of writing, none of the above have responded to Rigzone.

In a release posted on the U.S. Department of the Treasury website on Wednesday, U.S. Treasury Secretary Scott Bessent announced that the Treasury “is sanctioning Russia’s two largest oil companies that fund the Kremlin’s war machine”. In that release, the Treasury noted that “today’s actions increase pressure on Russia’s energy sector and degrade the Kremlin’s ability to raise revenue for its war machine and support its weakened economy”.

According to a post on the official X account of the Ministry of Foreign Affairs of Russia on October 23, Russian President Vladimir Putin said, “sanctions will NOT significantly affect our economic well-being”.

“Russia’s energy sector remains stable & confident. Our contribution to global energy balance is substantial. Disrupting this balance is not in the interest of the world,” he added.

To contact the author, email andreas.exarheas@rigzone.com