The predictable unpredictability of Trump's oil sanctions

The oil market just had its knee-jerk moment. Prices roared higher after the U.S. blacklisted Rosneft and Lukoil—but traders are already questioning whether President Trump’s sanctions will ever really stick.

Oil prices jumped 8% last week, with most of the gains coming on Thursday, the day following the U.S. Treasury Department’s announcement that Russia’s top two producers and refiners would be designated effective November 21.  

Market Focus Shifts from Glut Fears to Supply Squeeze Anxiety

The U.S. sanctions flipped the traders’ focus overnight, from fears of a glut to anxiety over a supply squeeze from one of the world’s top crude and product exporters. Before October 22, most of the market participants were focused on the imminent glut and the bearish risk from growing supply in a period of seasonally weaker demand. 

The sanctions announced on October 22 sent Indian refiners scrambling for alternative crude supply in the near term, while Chinese state-held oil giants have reportedly halted shipments of crude from Rosneft and Lukoil. 

The U.S. sanctions also sent oil prices rallying to above $60 per barrel WTI and over $65 a barrel Brent on Thursday. 

Geopolitical Risk Triggers Short-Covering Rally

“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,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote in a weekly commentary on Friday. 

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

Late last week, reports started to emerge that India’s top refiners would slash Russian crude purchases, while China’s giants, including PetroChina, CNOOC, and Zhenhua Oil, have temporarily halted purchases, at least in the short term, to assess the impact of sanctions. 

Traders Question Sanctions' Longevity and Impact on Supply

On Friday and Asian trade on Monday, oil prices leveled off, as the market moved beyond the knee-jerk reaction to the sanctions, and onto assessing how real the threat to severely disrupted Russian supply is.  

Investment banks and market participants began viewing the sanctions with more skepticism. 

Bjarne Schieldrop, chief analyst commodities at Scandinavian bank SEB, said on Friday that “It's our strong view that the only sensible thing is to sell this rally,” as U.S. President Donald Trump has become predictable in his unpredictability regarding tariffs and sanctions.  

SEB analysts don’t believe President Trump would follow through with the sanctions beginning November 21. 

Skepticism Rooted in Trump's Predictability and Unclear Secondary Sanctions

“So far Trump's threats have been all hot air and threats which later have evaporated after "great talks with Putin". After all these repetitions it is very hard to believe that this time will be any different,” Schieldrop said. 

India could seek to diversify away from Russian crude, but China “will likely stand up to Trump if new sanctions really materialize on 21 Nov,” the analyst noted. 

In SEB’s view, the sanctions would not reduce Russian crude supply. Instead, they would only “increase the friction in the market with yet more need for the shadow fleet and ship to ship transfer of Russian oil to dodge the sanctions. If they materialize at all,” Schieldrop said. 

Language in the U.S. Treasury’s announcement also leads to skepticism about the so-called secondary sanctions on entities dealing with the designated companies. 

Unlike in sanctions on Iran and Venezuela, for example, the sanctions implications on Rosneft and Lukoil include, per the Treasury, “Violations of U.S. sanctions may result in the imposition of civil or criminal penalties on U.S. and foreign persons,” and “financial institutions and other persons may risk exposure to sanctions for engaging in certain transactions or activities with designated or otherwise blocked persons.” 

Last week’s oil price rally was the result of increased geopolitical risk and redirection of crude purchases from the Middle East, not because the market has suddenly turned bullish, SEB bank’s Schieldrop said. 

Barclays, while acknowledging that a severe supply disruption from Russia could send Brent Crude prices above $85 per barrel, noted that “market participants seem skeptical that there will be a large, sustained disruption in Russian oil exports.”