Oil price cap, sanctions fueling 'internecine warfare' in Kremlin: US official

Sanctions on Russian hydrocarbons following its invasion of Ukraine are a "work in progress" but are succeeding in squeezing the country's economy while keeping oil prices in the low $70s/b, a senior US official told S&P Global Commodity Insights.

"Putin has completely militarized the country's economy and has devoted the vast majority of the state's resources to the war," Geoffrey Pyatt, assistant secretary of state for energy resources, said in an interview on the sidelines of an International Energy Agency summit in Paris. "Our goal is to drive down those resources as fast and as far as we can without disrupting global energy markets [to the point where] Russia can sell less oil but make more money because prices are up."

Pyatt added: "Having crude oil at $70 instead of $90 makes a material difference in terms of Kremlin revenues."

Since Russia's invasion of Ukraine in March 2022, the US and its G7 partners have implemented a string of import bans and price cap mechanisms targeting Russian oil.

Russia's key Urals crude grade continues to trade at a significant discount. Platts, part of S&P Global Commodity Insights, assessed it at more than $40/b in January 2023 but it has ranged between $12/b and $12.5/b since mid-July 2024.

Meanwhile, flows of Russian crude into less uneasy buyers, including China and India, have surged, with refiners in the Asian giants becoming hooked on Russia's discounted Urals crude. The two countries imported 2.9 million b/d of Russian crude on average in 2024, compared to 794,000 b/d in 2021, according to data from S&P Global Commodities at Sea.

"You have Russia in the penalty box and it's my job to ensure they stay there for as long as possible, certainly as long as this invasion continues," said Pyatt, who is responsible for leveraging US energy to advance the country's national security.

He added that the coalition was "clearly not done" and that "everyone has understood from day one that in a dynamic market if you have a regime like a price cap you're going to have to occasionally pull out the socket wrench and tighten the ratchet."

Nevertheless, he pointed to the plummeting value of the ruble to the lowest level since March 2022, and "reporting out of Moscow of some of the finger pointing and internecine warfare around the Kremlin as people try to figure out who to blame for the fact that Russian industry is starting to crater," as examples of the sanctions working.

European flows

Separate from the price cap, European nations have taken steps to disentangle themselves from Russian energy supplies, even though the country's oil and gas has continued to flow into Eastern Europe.

However, the five-year Russia-Ukraine gas transit deal is set to expire at the end of 2024, which would result in the loss of some 15 Bcm/year of Russian gas supplies to Europe via Ukraine if no new arrangements are put in place.

Rumors of an Azerbaijan-brokered deal to allow for the continued supply of gas via Ukraine have been dismissed publicly by Azeri officials.

"In Baku I met with energy minister [Parviz] Shahbazov, we had a very, very constructive conversation on a lot of these issues. On the question of Azeri gas, he made very clear that Azerbaijan did not want to do anything that would put it crosswise with the EU," said Pyatt.

"Our view is there's not a lot of utility to continuing transit through Ukraine as long as Europe is saying we want to get out of this anyway," he said. "And that's where the politics in Kyiv points us at this point."

Ukrainian officials have repeatedly said they would not extend the gas transit deal with Russia, while the EU has said it wants to end Russian gas imports by 2027.

He also pointed to a recent call between European Commission head Ursula von der Leyen and President-elect Donald Trump, in which the pair discussed US support for that effort, including supplying more US LNG.

Nevertheless, Pyatt said there remained "loopholes and gaps" that need to be closed.

Iran sanctions

Despite taking firm action against Russia's energy sector, the Biden administration has been seen dialing back sanctions on Iran, imposed during Trump's first term. Iranian production fell as low as 2.12 million b/d during Trump's term, but had risen to 3.19 million b/d as of October 2024, according to the Platts OPEC Survey from Commodity Insights.

US officials have sought to crack down on Iran's so-called shadow tanker fleet, which moves sanctioned crude -- including Russian barrels -- around the world.

"We are absolutely committed to implementing the law. Iran has been subjected to one of the most rigorous sanctions regimes in the history of the world," Pyatt said, adding that the US has just designated a slew of additional shadow tankers.

Pyatt's office has also worked closely to clamp down on oil smuggling from Iraq -- including the semi-autonomous Kurdistan region -- into Iran, which is "not to [Iraqi] prime minister Sudani's benefit," he said.

Asked about the impact of the incoming Trump administration, which previously pursued a "maximum pressure" campaign against Iran, Pyatt said only: "I imagine the Iranians read the same headlines that I read about what the Trump administration might do."