Will US petroleum sanctions expand more?

Some Western experts say that the sufficient global supply of petroleum will allow the US government to take measures against Russia, Iran and Venezuela.

Rachel Zimba, from the Center for a New American Security  (CNAS), said that the increase in US petroleum production has increased the global supply, which had decreased, but has not removed the risk caused by the tightening of sanctions. She added: “If easy oil conditions persist, in line with sluggish growth, I do think they may make it easier to continue with enforcement”.

Fernando Ferreira, a Director of Geopolitical Risk Service at Rapidan Energy Group, said that petroleum prices have come down quite a bit and most analysts seem to be concerned with further macro risks, so Washington can risk some sanctions-related disruptions without worrying too much about a price spike. He pointed out that the “current market conditions give the administration more wiggle room to act”.

US West Texas Intermediate Nimax contract prices ended 2023 with about five percent decrease compared with 2022 price levels as markets expect a supply glut in early 2024. Data from S&P Global Commodity Insights shows that non-OPEC supply growth will outpace global demand growth in 2024. Even if OPEC extends its voluntary supply curbs, there will still be a 2.2 million bpd surplus in the first quarter of this year.

Data from S&P Global Commodity Insights shows that global inventories increased in the final months of 2023, and production is expected to increase in early 2024, and reach its peak with the addition of about 150 million barrels of petroleum in May.

Other factors

It is expected that other factors such as regional conflicts, OPEC+ decisions, the expansion of American and Chinese demand and the disruption of the main shipping routes will be more important than sanctions decisions for global petroleum supply.

While some experts believe that Washington has freedom of action regarding sanctions, others say that the risks caused by these factors actually limit the options of the Biden administration.

Brenda Shaffer, an energy expert at the US Naval Postgraduate School, said that disruptions in the world's main waterways will affect shipping and insurance prices and impose a new premium on petroleum and liquefied natural gas (LNG) prices. Addressing waterway security directly may add jitters to the global oil price, she said. She added: “With this in the background and in an election year, it is not likely that the Biden administration will enforce sanctions and undertake policies that will take oil barrels off the market”.

About 8.25 million barrels per day of petroleum and refined petroleum products passed through the Suez Canal from January to November 2023, according to data from S&P Global Commodity Insights. Of this amount, 4.72 million barrels per day were destined for the south, including 2.7 million barrels per day of petroleum, and 3.531 million barrels per day were destined for the north, including 1.275 million barrels per day of petroleum.

Focus on Russia

According to Ferreira, the focus of Washington's immediate petroleum sanctions is on Russia. We expect that next year, there will be more seriousness in applying sanctions. Strict enforcement of sanctions will increase the costs and risks associated with the fleet of shadow tankers, and more exports will be carried out in accordance with the price ceiling set by the Group of Seven.

Zimba expects the implementation of the price cap mechanism for Russian petroleum exports to become more targeted, with more tankers added to the blacklist and perhaps surprise inspections. But to insulate the global economy against shocks, wider sanctions are not recommended.

The U.S. may see lower petroleum prices as an obstacle to tightening sanctions against Russia's shadow tanker fleet, analysts at ClearView Energy Partners wrote in a Dec. 20 note.

According to Global Commodity Insights data, Platts estimated the price of Urals oil shipped from the port of Primorsk from December 6 to 12 below $60 per barrel.

Limited action against Iran

Most experts expect little changes in the imposition of US sanctions on Iranian petroleum. Ellen Wald, the president of TransVersal consulting company, said: “I don't think Biden will enforce the sanctions on Iran any more strictly than he has now”.

Ferreira also doubted that anything would change and stated: “No one seriously believes this administration is willing to take the type of enforcement actions against Chinese traders, shippers and buyers that would crimp Chinese imports of Iranian oil”.

The situation in Venezuela

Ferreira said that in Venezuela, where the US eased petroleum and mining sanctions for six months in exchange for progress toward fair elections in 2024, the Biden administration will likely defer to the Venezuelan opposition’s assessment of whether Venezuelan President Nicolas Maduro is delivering on his promises.

He continued: “Neither the Biden administration nor the opposition want to undermine the process by prematurely reimposing sanctions, so any changes before April will be symbolic, if they happen at all. I suspect we’ll roll over the licenses again in April and wait until after the Venezuelan elections to make any adjustments”.

According to the Platts report, Zimba said that the US will probably be flexible in the negotiations and will be wary of reimposing sanctions that could undermine humanitarian issues. She added that the sanctions pause will likely remain in effect at least until the six months expire, but some areas of sanctions may be reinstated, including potentially those on the gold trade.