Oil Shipping Rates Increase as U.S. Sanctions on Russia Take Effect

What Happened?

Rates for shipping oil on supertankers increased this week due to an expansion of U.S. sanctions on the Russian oil industry.

The U.S. Treasury Department announced this week, ‘Today, the U.S. Department of the Treasury took sweeping action to fulfill the G7 commitment to reduce Russian revenues from energy, including blocking two major Russian oil producers.’

Consequently, the rates for Very Large Crude Carriers (VLCC) going from the Middle East to China increased by 39% this week.

Standard & Poor’s also reported that the costs of shipping Russian Eastern Pacific Siberian Pipeline (EPSO) blend to China more than doubled.  

Why it Matters

The U.S Treasury Department explained in more detail:

‘Today’s actions also impose sanctions on an unprecedented number of oil-carrying vessels, many of which are part of the “shadow fleet,” opaque traders of Russian oil, Russia-based oilfield service providers, and Russian energy officials. Today’s actions are underpinned by the issuance of a new determination that authorizes sanctions pursuant to Executive Order (E.O.) 14024 against persons operating or having operated in the energy sector of the Russian Federation economy. These actions substantially increase the sanctions risks associated with the Russian oil trade.’

Secretary of the Treasury Janet Yellen issued a statement saying:

‘This action builds on, and strengthens, our focus since the beginning of the war on disrupting the Kremlin’s energy revenues, including through the G7+ price cap launched in 2022. With today’s actions, we are ratcheting up the sanctions risk associated with Russia’s oil trade, including shipping and financial facilitation in support of Russia’s oil exports.’

And according to Florence Tan of Reuters:

‘Many of the newly-targeted vessels, part of a so-called shadow fleet that seeks to avoid Western restrictions, have been used to ship oil to India and China, which snapped up cheap Russian supply that was banned in Europe following Moscow's invasion of Ukraine. Some of the tankers have also shipped oil from Iran, which is under sanctions as well. The latest U.S. action means an estimated 35% of some 669 shadow fleet tankers involved in shipping Russian, Venezuelan and Iranian oil have been hit with sanctions by either the U.S., Britain or European Union.’

The new sanctions come alongside the initiation of Operation Baltic Sentry by NATO, a new naval and air operation designed to protect critical infrastructure in the Baltic from sabotage.

How it Affects You

To date international sanctions against Russia for its invasion of Ukraine have had mixed results, with Russia being able to evade many of the sanctions through the use of illicit oil trafficking. These new sanctions represent an effort to close some of the loopholes Russia has been exploiting since the invasion of Ukraine began.

While the new sanctions will likely have an impact on Russian oil sales, demand for Russian oil in places like China and India will still provide strong incentives for buyers to find new ways around the latest sanctions.