From glut to tightness: US sanctions on Rosneft and Lukoil create (temporary) havoc

Commentary Summary:

– Crude timespreads return to backwardation after a brief spell in shallow contango

– Chinese teapots may not be able to capitalize on Russian barrels due to limited crude import quota and may take straight run fuel oil as feedstocks instead

– Only Yulong may switch to more Russian barrels as they have been affected by UK sanctions

– With soaring AG premiums, WAF and WTI arbs are open to the Far East again. Cargoes that can arrive earlier have a premium benefit.

A week ago, the market was contending with an oil glut with timespreads in contango from Q1 26. With the announcement of US sanctions on the 2 largest oil producers in Russia late 22 Oct, the markets shifted dramatically, with Brent and Dubai timespreads up and market structure firmly in backwardation again.

(Dubai and Brent timespreads back to backwardation after a brief spell in shallow contango)

So far, markets are waiting for more direction on whether the impact of sanctions scheduled to take effect from 21 Nov will truly actualize. There is a train of thought where the 1-month period allows market players to find ways to adjust to the new realities.

After all, Russia has operated before on EU sanctions so they may yet find ways to get their oil to China and India without relying on USD as a means of transaction.

Chinese teapot refineries that are already facing sanctions without even taking Iranian barrels this year, may well be tempted to access the Russian barrels. However, their hands are tied for the remainder of 2025 as their crude import quotas are almost exhausted and may turn instead of Russian fuel oil as an alternative feedstock.

Yulong Petrochemical will be the one to watch as there are reports of majors and gulf exporters cancelling their cargoes to this 400 kbd independent refinery due to the UK sanctions and they would then have the quota to import Russian barrels instead. Prior to this, approximately half of their total imports were already Russian origin.

In the meantime, there is a short-term supply gap to be filled for India which appears more willing to heed the sanctions call. Physical crude markets are trading early Dec to Jan arrivals into WCI and the only cargoes that can arrive in the earlier part of the trading window are AG and WAF barrels.

Brent-Dubai EFS rose only 50 cpb throughout the whole drama whilst fundamentally we expected Dubai to strengthen, so it was left to physical crude premiums to do the heavy lifting.

Oman saw the biggest uplift of 188 cpb post sanctions announcement but has since eased down vs other AG grades, levelling out now around 130 cpb higher. Basrah crudes are trading Nov loaders now compared to the rest of the AG barrels so may trade stronger than the other medium grades.

Hopefully the fire at Zubair-1 depot that transports crude to the storage tanks does not impact Basrah oil flows, otherwise would further fuel the soaring AG spot market premiums.

(WAF crude arbs into WCI open vs AG)

For econs of barrels arriving in Jan, given the unexpected strength in Murban, WTI landing at Jan Dubai + 510 cpb is now looking cheap again into the Far East on delivered price basis. Expect a flurry of WTI deals to be closed this week as markets pull in cargoes to replace the expensive Murban. TMX barrels are of course highly attractive as well into the East.

(WTI looking competitive again vs Murban into Far East)