An emerging oil glut will help augment the economic punch from President Trump’s new round of sanctions against Russia.
Crude oil jumped over four percent on October 23 after the United States announced sweeping sanctions targeting Russia’s two largest oil companies, Rosneft and Lukoil. The sanctions were a shift in US policy, where President Trump had previously said he would only sanction those two companies after European countries completely halted oil purchases from Russia.
The sharp price response in futures markets reflected a large number of speculative traders who were wrong-footed by the move. It came as a record number of short positions were open on crude oil contracts, triggering a massive short-covering rally. The bump in crude oil has not lasted, however, and Brent closed at $63.69 on October 28, only $1.10 higher than the $62.59 close on October 22 prior to the sanctions headlines, and down from $65.99 on October 23.
The lack of staying power for the price increase stems from the broader conditions in the market, amid OPEC+ continuing to unwind several years’ worth of production cuts, as well as the market’s skepticism that the sanctions will take much actual Russian oil off the market. The successive OPEC+ quota increases have created an expectation in the market that prices will generally be going down over the next year.
The size of the inventory build is debatable, but other than OPEC’s own rosy demand forecast, most observers believe it will be substantial. Ironically, that was a major part of the reason why the large volume of short positions that drove the October 23 rally existed.
There is a very strong seasonality to oil demand, with Q3 being the highest refinery throughput globally, and as Q4 2025 has gotten underway, there has been a noticeable rise in the amount of crude oil currently “on the water” —either in transit at sea or stored in tankers. The surplus potentially opens an opportunity for Russian export volumes to fall substantially without a troublesome rise in crude oil prices, but this is more of an avoidance of a more bearish outcome than would have otherwise been the case.
Some have argued that the market is overly complacent about the impact of the new sanctions on Rosneft and Lukoil. While the price cap imposed by the United States and the EU has been relatively ineffective and threats of secondary tariffs against India and others have been clumsy and misguided, the new sanctions are more similar to those imposed against Iranian oil —secondary sanctions aiming to cut off Russian oil majors from banking, transportation, and every other foreign transaction they need to operate. Buyers have a brief grace period until November 21 to comply.
There are already solid indications that Indian companies will comply, with refining and petrochemical giant Reliance Industries stating that it would do so. India has been the largest buyer of Russian oil in recent months.
That potentially leaves China as the buyer of last resort, as it is with sanctioned Iranian volumes. The largest Chinese national oil companies (NOCs) have global business exposure, but independent refiners located mainly in Shandong Province do not. This has left them relatively free to evade US secondary sanctions with the aid of smaller regional banks.
If the full volume of crude oil currently going to India were rerouted, that would compete with Iranian barrels already coming in at a discount for refinery capacity. Another possible workaround would be that some of the volume would go into storage without being purchased by the main Chinese NOCs. China has added nearly a half billion barrels of storage capacity over the past five years, and while inventories have waxed and waned slightly, they have not been filling it at nearly that rate of construction. The empty tanks could potentially take some of the excess, but it would probably result in a lot of pressure on Russia and Iran for deeper discounts.
The jury is still out on how effective the sanctions will be overall, but it does seem probable that they will cause more financial pain to Russia than has thus far been the case, even if most of the volumes continue to flow. Even if some of the volume ends up shut-in, though, the upside to prices would be limited by the ample spare capacity Saudi Arabia and the UAE currently possess. There are stabilizing factors on both sides.
About the Author: Greg Priddy
Greg Priddy is a Senior Fellow for the Middle East at the Center for the National Interest. He also consults for corporate and financial clients on political risk in the region and global energy markets. From 2006 to 2018, Mr. Priddy was Director, Global Oil, at Eurasia Group. His work there focused on forward-looking analysis of how political risk, sanctions, and public policy variables impact energy markets and the global industry, with a heavy emphasis on the Persian Gulf region. Prior to that, from 1999 to 2006, Mr. Priddy worked as a contractor for the US Energy Information Administration (EIA) at the US Department of Energy. Mr. Priddy’s writing has been published in The New York Times, The National Interest, Barron’s, and the Nikkei Asian Review, among others.
Image: Shutterstock/Igor Hotinsky
