Tightening the Noose

Russian energy sanctions, LNG, and COP29.

Transitioning from one presidential administration to another in the United States is a strange time in international diplomacy. The departing administration, in power for two-and-a-half months, continues to push its international agenda and conduct diplomacy under the feigned illusion that the rest of the world cares what they say and do. The rest of the world, in turn, feigns respect for, and attention to, the outgoing administration while it focuses on the incoming administration, searching for rumors and whispers of who is taking leadership roles and what their specific policies will be on a wide set of issues come January 20th.

In a perfect world, the transition period between the incumbent and the president-elect are uneventful and inconsequential. Alas, we do not live in that world. The animosity between the Democratic incumbent and the Republican president-elect is palpable, and the outgoing administration doesn’t seem to care if it leaves things a mess for the incoming one. For example, the current U.S. Administration has publicly indicated its commitment to tightening the screws on Russian government revenues through enhanced sanctions on its oil sector. It is also stepping up efforts to reduce Russian LNG exports (not necessarily a bad thing), and announcing new climate commitments and partnerships which will be worthless come January 20th.

First, the “Biden” administration (I use quotations as we don’t actually know who is running the U.S. government now — it most certainly is not President Biden) is chomping at the bit to tighten sanctions against Russia’s energy sector in an effort to reduce funding for its war effort. A recent 60 minutes story highlighted the significant Russian oil and product exports via the dark fleet, avoiding sanctions and the oil price cap essentially at will. It is widely accepted and understood that, to date, energy sanctions have had little material impact on Russian government revenues. With only two months left in power, the outgoing U.S. administration could throw caution to the wind and try to clamp down hard on Russian oil and product exports in a substantive way.

U.S. State Department Under Secretary Jose Fernandez had this to say in late October about sanctions on Russia:

First, we need you to help us collectively harmonize and tighten our controls, while at the same time strengthening the measures we have already imposed so they are more effective. We need you to uncover the increasingly complex procurement networks Russia is attempting to use to circumvent our sanctions and export controls, so that we can shut them down and force Russian buyers to spend time and money on higher-cost networks. And then we need to find and stamp those out too.

To date, the United States and European allies have designated a few dozen dark fleet tankers for illicit oil trade. They have not taken additional action due to fears of taking large amounts of oil off the international market, potentially causing global oil prices to rise. There is significant scope for sanctions designations on hundreds of additional tankers given the dark fleet is estimated at roughly 600 ships worldwide operating outside the normal shipping market. According to industry estimates, roughly 70% of Russian seaborne crude was carried by the dark fleet in September 2024. Here is an image from Politico showing the shift in Russian seaborne crude shipment since January 2022:

Tightening enforcement of the oil price cap is another option. There have been some obscure, small level traders that have been sanctioned for buying Russian oil above the price cap and then using European insurance and service providers for the cargo. But the United States and Europe have largely used the risk of sanctions to drive compliance as opposed to strictly enforcing them. But it has not worked as the purchase price of Russian crude oil has exceeded the $60 per barrel price cap for quite some time. Strict enforcement could come in the next month or two. Here is what Keven Book of Clearview Energy Partners had to say about this,

A cap enforcement crackdown runs the risk of driving up crude prices. Plus, using ‘secondary’ sanctions to enforce the cap could push reputable insurers out of the Russian crude game entirely, leaving the market to potentially insolvent stand-ins.

This seems like a serious risk that policymakers in Washington are hopefully giving due consideration too.

Washington could also consider additional sanctions on prominent Russian energy companies or pushing China and India to reduce its purchases of Russian crude oil, but the latter will be challenging to do as the West has little to incentivize this desired change in behavior.

What has changed in the oil market to make the U.S. administration consider tightening the screws now and risking taking barrels off the global market? In short, it has become a lot “looser”, meaning there is ample supply and prices have retreated from where they were over the last two-plus years. September 2024 Brent price for oil was its lowest since December 2021.

OPEC+ has announced plans to bring some of its production back to market in the coming months. It has shut in over 5.5 million barrels of its own supply in recent years and aims to bring back over 2 million barrels in 2025. In addition, non-OPEC+ oil production continues to grow from producers such as the United States, Brazil, and Guyana. OPEC also recently revised downward its demand forecasts for 2025 due to weaker demand forecasts in China, India, and other regions.

With this in mind, the Biden Administration may feel emboldened to take stronger action against Russian oil supplies because 1) the oil market can potentially handle it, 2) what do they have to lose, they are out of power January 20th, and 3) why not try to make things a bit more difficult for Russia? With no election looming, and no prospects of returning to power, the current administration cares less about negative impacts to the U.S. and global economy if oil prices rise due to sanctions. The impact of tighter oil sanctions will be a Trump problem.

Liquid natural gas supplies have been a constant energy security issues since the end of 2021. Reportedly, it was one of the few items EU President Von der Leyen and President-elect Trump talked about on their call last week, with Von der Leyen saying Europe buying more U.S. LNG will help it replace Russian LNG. This is something that Washington, D.C. and Brussels agree on, and its likely this approach will continue in the Trump administration.

In theory, ending European purchases of Russian LNG sooner than 2027 would hurt the Russian government revenues as longer transit routes to alternative markets would reduce the amount of cargoes it exports. But it could easily go the opposite direction if global LNG prices rise in response to the heightened sanctions risk.

Europe will also be in need of more LNG starting January 2025 assuming the natural gas pipeline transit contracts through Ukraine are not renewed when they expire at the end of this year. Replacing the Ukraine transit amounts of natural gas at the same time as potentially phasing out Russian LNG will be a difficult task as more LNG from alternative sources will be needed, and will possibly mean higher natural gas prices in Europe.

The last thing to keep an eye on, if for nothing more than entertainment, are the energy-related announcements coming out of COP29 in Baku. The international government bureaucracies will undoubtedly turn out a number of high ambition, low execution pledges which result in a lot of self congratulatory public statements about the major climate impact….blah blah blah! Just kidding, nobody will care about this any more. In fact, most major western world leaders are skipping this year’s COP event and, if we are truly fortunate, the importance of this awful event will continue to recede into oblivion. You cannot despise it enough.

But keep an eye out on the increases sanctions risk on oil markets and a push to phase our Russian LNG purchases from what’s left of the “Biden” Administration — could be bearish for energy prices during the holiday season.

Please like “🖤” this piece (assuming you do!) and let me know what you think in the comments section. Let me also know if there are current issues you’d like me to address in subsequent posts. Thanks!