New EU oil sanctions muddle market

Danish physicist Niels Bohr said of quantum mechanics: if they have not profoundly shocked you, then you haven't understood them yet. It is tempting to say: if the latest EU sanctions on Russian oil have not bewildered you, then you haven't understood them yet.

The sanctions introduced on 21 January are advertised as banning products made from Russian oil. But for a start, they only ban a few products. They do not apply to LPG, petrochemicals, or bitumen made from Russian oil, to name a few. And the sanctions can only define their target approximately, because almost every barrel of Russian oil shipped out of Russia is mixed with non-Russian oil as soon as it leaves the ship. So, the sanctions ban some fuels that are partly made from Russian oil.

But even this qualified goal presents a puzzle. Fuels made partly from Russian oil do not turn a special colour under ultraviolet light, nor will any other lab test reveal them. The core text of the sanctions does not engage with this problem, lacking any practicable proxy for the targeted fuels. The European Commission attempted a practicable proxy in a frequently asked questions (FAQ) document last year, essentially asking refineries to attest they have not processed any Russian oil in the past 60 days. But the FAQ left an important loophole by appearing to apply the 60-day rule only to single-production-line refineries. And the FAQ is not binding anyway, so traders have no guarantee any authorities will even attempt to follow its guidance. 

The result is, one month after the sanctions came into effect on 21 January, traders are still unsure which trade is allowed and which is not. Traders are still waiting to see what each other will do, and what authorities and banks will do, case by case. The result tends to be over-compliance or "self-sanctioning" — many traders refuse to do things that are probably allowed.

All four of the refineries that (1) used Russian oil last year, and (2) regularly exported applicable fuels to the EU, have exported much less to the EU in the first month of the sanctions than in the same month last year. Unsurprisingly, zero applicable fuels have come from the two refineries that seem to have continued using Russian oil as before. But there has also been a steep reduction in the volume of applicable fuels reaching the EU from the two refineries that genuinely seem to have taken the required steps to supply compliant fuels.

Reliance's Jamnagar refinery and Tupras' Izmir refinery say they are supplying compliant fuels, not made from Russian oil. Still, only around 100,000t of applicable fuels from India's Reliance have discharged in the EU in the first month of the sanctions, compared with 310,000t in the same days of 2025, Vortexa tracking data indicates. Around 50,000t of applicable fuels from Tupras' Izmir refinery in Turkey have discharged in the EU, compared with 95,000t in the same days of 2025.

Traders can be mulishly sceptical. Tell a trader, "This refinery says it has stopped refining Russian oil", and the trader will scoff. And they are seriously afraid of the consequences of breaking sanctions, so their scepticism weighs heavily on their minds.

Adding Jamnagar and Izmir to the two other relevant refineries, which seem to continue using Russian oil, a total flow of more than 800,000t has dwindled to around 150,000t in the first month of the sanctions. So far, the fuel most affected is diesel, but there is little concern over its supply, because rising EU imports from other sources have more than compensated for the loss.

The European Commission told Argus earlier this month that the sanctions were sufficiently clear. That was frustrating for this reporter to hear, after weeks wading through a morass of unanswerable questions. But the commission is right, if the test is the effect on the price of Russian oil. Since December, Russian Urals crude loading at Primorsk in the Baltic has priced at the cheapest since the first year of the Covid-19 pandemic. Urals has crashed to a 40pc discount against North Sea Dated crude, the steepest since March 2023, four months after the EU's ban on Russian oil, which remains by far the most significant oil sanction yet deployed. The latest decline in prices is also partly due to new UK and US sanctions on Russian oil companies Rosneft and Lukoil.

The steeper discount is denying Russia around $15/bl of oil export income, versus six months ago. At this rate, by peculiar coincidence, it would deny Russia around $2.026bn of export income per month in 2026. For the European Commission, that may be sufficiently clear.

Author name: Benedict George, Editor, Argus European Products, Oil