EU sanctions, ceasefire, and OPEC+ move—what are the implications for Asia?

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Sambit Mohanty:

Hello and welcome to Platts Oil Markets podcast, a series by S&P Global Commodity Insights. Oil is going through a period of uneasy calm. The higher than expected rise in OPEC+ production quotas for August combined with a ceasefire between Israel and Iran, has provided oil markets some breathing space and has introduced a bearish sentiment to prices. But new EU sanctions on Russia and the possibility of additional secondary sanctions by Washington could change the price and create flow scenarios very soon. I am Sambit Mohanty, Asia energy editor and your host for today. To discuss some of the key themes. I'm pleased to welcome Rahul Kapoor, vice President and head of oil shipping analytics at S&P Global Commodity Insights, and Dan Colover, head of oil and chemical markets engagement. Welcome all.

Dan, let me start this podcast with a question to you. The eight members of the OPEC+ Alliance implementing voluntary cuts agreed on July 5th to hike their production quotas by 540,000 barrels per day in August accelerating their claw back of market share. The group was of the view that members were encouraged by healthy market fundamentals, which was reflected in low oil inventories. The increase in 33% more than the previously agreed monthly increases of 411,000 barrels per day that was agreed to in their previous three meetings. And there were expectations that the group would repeat the same for August. How do you think the OPEC+ Unity will hold as production cuts are unraveled?

Dan Colover:

Yeah, I think overall it could be beneficial for OPEC+ Unity as it means really there's less pressure on those that are not adhering so closely to the production cuts. What we're seeing really, I suppose is the OPEC+ has yet to really feel significant price pressure since the unwinding began earlier this year, oil is still steady around that 68 level. There's been some ups and downs of late and we are seeing a reduction therefore in the spare capacity as this oil production comes back online. But I think the resolve really to increase at the expense of price remains untested in the sense that the price hasn't reacted significantly yet as a result of this extra barrels coming on the market. Now, some of that people are saying is seasonal because that additional production is being consumed through direct burn.

We're now in the summer months, it's very hot in the Middle East and a lot of oil is being consumed for power generation so that air conditioning can work to the max and keep people cool. I suppose the question is once that hot weather cools down, if that oil is not consumed for power generation and gets released more into the open market, if prices start to move down, will they hold the course? Will they see if the higher cost non-OPEC related producers start curtailing production? People will always say they're looking at how is OPEC behaving and how is the US shale producers behaving as well? Will OPEC stands firm from their side, try and watch if the US cuts that production and therefore supports prices in their mind or will they look to start to take some barrels off the market again, if the prices do go south? That's the question, how will that unity come about? How do they start pulling those barrels off the market again, should they need to?

Sambit Mohanty:

Sure. Nicely summed up the situation there Dan. I'll stay with you for the next question and a little bit on Asia. Asian refiners have welcomed the OPEC+ decision to sharply raise screwed output as regional buyers are looking to avoid over-reliance on Middle Eastern supplies, they're focusing on diversification to maximize their refining margins and minimize logistical risk. What will be the implications of the OPEC+ decision on Asia given non-OPEC supplies are also rising and are gaining market share in the region.

Dan Colover:

So overall more choice for the market and the oil importers will be well received Overall, we've seen diesel margins have been good and that's supported refiners margins as well and that's been well received. But on the other hand, you do have increased buying from China for stockpiling, which has arguably supported prices. That's despite that higher exports from those producers. But overall refiners in Asia will welcome this increased production from the Middle East. They'll also be able to look towards higher non-OPEC production forecasts and we really see that refiners in Asia now have a wealth of choice on which crude they will process. They're reviewing every day, which crude to buy. They have an abundance of different barrels, be it from Canada, be it from Brazil, be it of course you've got those Middle Eastern barrels largely purchased on a long-term basis, but in those spot barrels that they're buying as well, they have an abundance of choice, including of course as well from the US Gulf coast.

Sambit Mohanty:

Exactly, Dan, I mean we've seen for instance in countries like India, India has double its crude purchases from the United States, so there's a lot of choices. A lot of the refiners are diversifying given what's happening in the Middle East. So we have to wait and watch how the situation pan out there. Let me turn our focus from OPEC two sanctions now Rahul, let me come to you for the next question. The EU sanctioned 105 ships in its latest enforcement bringing the total number of blacklisted ships to 444. S&P Global Commodities at sea data shows that the recently sanctioned ships have lifted close to 734,000 barrels per day of crude and oil products from Russia so far this year.

And these are numbers which you'll be looking at very closely and the UK separately sanctioned 135 tankers involved in sanctioned Russian oil treats, which according to the foreign office, has been transporting $24 billion worth of cargo since early 24. But the key thing here is that analysts and the marketplace are expecting that outside of the price cap, expecting that Shadow Fleet operators, which control sanctioned tankers and non-sanctioned ships are likely operating outside of the price cap to have more opportunities transporting Russian oil with a new EU cap driving Greek companies away from Russia, how these developments will affect Dark Fleet and what according to you is in store in the second half on that front.

Rahul Kapoor:

Yeah, thanks Sambit. Good to be here, sir. I think your team's doing a great job on the platform news team connecting all the dots here. The key thing is I think this is a very significant package and there are multiple things happening here. We're talking about the Russian crude imports, we're talking about the fuel exports back into Europe as well as the fleet side. So the fleet sanctioning has been going on since the last two years in that sense, I think what effectively has happened is the global tanker fleet, which is now what we call Dark Fleet, Grey Fleet Shadow Fleet is close to around 12 to 14 person. That's a huge number. So we're talking about thousands of ships now, and I think last time when we did that number, the sanctioned fleet is closer on 1,200, 1,400, but something within commodities at sea, what we do is we look at what we call gas at risk vessels.

So commodities at sea, at risk vessels. These are not sanctioned today, but the ships which are basically called on Iran, called on Venezuela, Russia, have basically lifted from one of these sanction entities, ports and flags of convenience, which are not. That is a much bigger number, that's around 2,500, 25 to 2,600 ships. What we are seeing is, and we put out this late last year, what we are seeing is more of those ships which we had identified in two commodities at sea at risk vessels are now coming in as sanctioned vessels by both the EU and UK. So this will continue to grow. A lot of ships still available on the Shadow Fleet. What would happen is you have this huge, and because of the price cap or the oil prices being lower or somewhere in that range, we saw a lot of Greek owners particularly, because it's not violating a sanction if you operating within those zones of the price cap to lift Russian oil.

So we saw a lot of those vessels come into the fleet over the last, and it's been going up and down, but over the last few months as all prices corrected, we did see a lot of them coming back into the carriage of Russian cargoes. What would happen is now with this initial threshold of what you have this floating price mechanism of the Russian crude price, the floating cap kind of a thing, many of those would start leaving that trade particularly on carriage of Russian cargoes, particularly on the crude side. That will open up an opportunity for these older vessels, Shadow Fleet vessels which are already part of the mix to start carrying these cargoes a lot more. And the interesting thing is we see that how that continues to develop is the second-hand vessel values of let's say the VLCCs older Aframaxes older Suezmaxes, they are nearing record highs.

Even 20-year-old vessels which are being sold, they're selling at a higher price than they were selling let's say even few quarters and even few years back. So that has been a consistent trend which we are witnessing today and that will continue to play out. So Shadow Fleet continues to grow. It's not going to disrupt in terms of availability of vessels. So the Shadow Fleet availability is there. I think it then comes down to the after effects of the newly introduced ban on import of products and what does that do to the crude imports from India and so on. But on the Shadow Fleet, you will still find a availability of tonnage and if the cargoes are there, they'll be lifted. That's an opaque system of shipping and it's worked very well over the last several decades I would say. Don't expect any change there.

Sambit Mohanty:

Sure. It'll be very interesting to see how the new EU cap is going to achieve that scenario. Rahul, thank you for that. I'll stay with the EU sanctions theme and I'll ask Dan the next question. Dan, obviously we have seen how the EU has embarked on the most significant revamp of its all sanctions against Russia in more than two years. We saw that in the 18th sanctions package against Russia. Brussels introduced that floating price mechanism which Rahul spoke about. What will be the impact of these new EU sanctions on refined product flows from India and the Middle East to Europe?

Dan Colover:

Thanks Sambit. I think this really is all a bit of an unknown. The implication is really, I guess if it's effective and adhered to, as we said, it's going to be hard to work out how it's all can be tracked, but it could really lead to another reshuffling of refined product flows, how that really pans out is also unclear. Europe is fundamentally short diesel and has been cutting back on refining capacity in recent years. The question would be if those barrels stop flowing from India, then is the Middle East there to really provide more refined products to Europe?

Than India would have to find new outlets for its refined products that have been flowing to Europe. So it could be a bit of another merry-go-round in that respect. Ultimately it's early days around all of this I think. I think there's a real lack of clarity, how will these things be defined? We already know once barrels go into a tank somewhere else and then they come out again, they can be relabeled. Are they people going to be looking at the relabeling? These molecules as they turn around, as they move around, tracking them is already very hard. Will it get even harder if we now have to establish the crude oil that was normally used to produce these molecules? I think that's something I'm not sure it's ever really been done before to be honest.

Sambit Mohanty:

Yeah, you absolutely nicely brought up that re-labeling. I mean, and this is probably going to next question, you have brought it up, Dan. Now Rahul, let me come to you for the next question. And this is related to the India's Vadinar refinery, which also saw some sanctions imposed by EU recently. This has obviously raised questions on crude origin tracking, enforcing crude origin, basing in refined products is technically and logistically complex process because refineries blend multiple crudes across various sources. And there is no established foolproof tracing system or any global blockchain for refined products for that matter. This makes sanctions hard to implement effectively. If you can share your thoughts on this, on what you are hearing from the markets.

Rahul Kapoor:

I think very important, and Dan already mentioned this. So we track these cargoes, we know where they're lifting, we even know the grades and then whether it's Russian cargo or even CPC blend and all. So we are able to do that, but once it goes, like Dan said, once it goes into a refinery and refineries are not just using Russian cargoes, and I understand, I think your team itself published something from the Indian Refiners talking about this, how difficult it is to basically do that traceability. And the second thing there is I think what Dan was saying is we have some dispensation until October and then effectively it's a story of 2026, particularly on the fuel oil exports or banning of these imports into Europe for Russian used crude and then turn into a refined product. So what limited I would say in the current capacity is that traceability is extremely difficult.

Certain refiners who are using Russian cargoes are also using crude cargoes from Middle East, West Africa, even Latin America and so on. So how would you determine whether it's a Russian cargo, or turn into a refined product or if it's, let's say if they import a US cargo and then turning into, so that will remain extremely challenging and that's where the complexities of the whole logistical system as well as refining system comes into play. And second thing is, I think you asked about what would happen for the particular refinery in that sense, I think, so they'll have to find new markets. So as of right now we are tracking, I think you particularly talked about Nayara as well there. I think their exports are limited in that sense, not too big as exposure, but they do have a huge exposure in terms of imports, that's around 70, 75%, if I'm them not wrong I think for Nayara particularly.

And then you have others like Reliance Indian Oils and others as well. So India has as an, and this is where the whole thing comes about, is from 2% in the import basket, we are at 35, 40%, if you look at last year somewhere in 35%, so you have a significant increase or rather I would say dependency of India now on Russia. It's easy to say that they can diversify and go back in a very short period of time, but then you basically, if you start sourcing from somewhere else, the other players also in the market who want the same crude. So it's certainly an impact on India and this package has already been announced. We still have to see how it plays out, but this is certainly an impact as well as higher cost for Indian refineries for sure, if they are to source elsewhere because Russian crude is cheaper.

Sambit Mohanty:

Sure. Thanks Rahul. I'll stay with you for the next question also. It's more about the global shipping markets, and we've seen how the global shipping markets underwent a dramatic shift last year and also so far in 2025 as escalating maritime security threats in the Red Sea force seems to ships to re-route adding to the voids times and reshaping bunker fuel demand. The ongoing conflict in the Middle East, notably the Houthi attacks has led many shipping companies to bypass the Suez Canal route. This has increased pressure on infrastructure at ports in the Mediterranean, East Africa, South Africa, and the Indian Ocean. So if you can sum up your views on developments around global shipping choking points, the Strait of Hormuz, Red Sea, and the implications that might be for Asia at this point of time.

Rahul Kapoor:

Certainly, I think we don't have to go back too far. We know over the last two years all of these things have happened, but the most recent one, and this is where I think all of this came about, is I would say the Iran-Israel conflict and when there was a clear risk that the Strait of Hormuz, that wasn't a base case, it was a low probability event, but very high risk event if the Strait of Hormuz were to be closed. But all of us know the reason, dependency of Iran in terms of being able to export its oil for all the GCC countries, dependency of Asian buyers, particularly China on that and so on. So it was a low probability event but higher risk. So I think that came about and then you saw the risk premium on the oil and then eventually it came off.

But the second thing, I'm not sure how many people noticed that, but the big one was what we were tracking this year essentially was some kind of normalization on the Red Sea, Suez Canal side. What I mean by that is we did see this year particularly, and it's mostly the Suez Canal, Red Sea route is primarily being used as of today by I would say Chinese-affiliated vessels, fleets and the non-compliant vessels operating within the Shadow Fleet. This is what was happening I would say the last 18 months. But in the second quarter we did see some compliant tankers when we say compliant tankers is ships which are outside of the Shadow Fleet and let's say opportunistic operators as well as charters and traders started resuming some of these Suez Canal transits. And this was particularly happening for refined products. So even some Indian cargoes, which were earlier going by Cape of Good Hope started transiting the Suez Canal.

And we did see some loadings which came up, but now I think what has happened is they have been suddenly out of, this was first time this year since late last year, we've had two major attacks on these two dry bulk vessels. We saw Magic Seas and another one being Eternity Sea. They were effectively sunk in the Red Sea right after being stuck by the Houthis, effectively Houthi fired rocket-propelled grenades, and then there was a huge, I think there was a video recording which was put out. So in a sense, that did create a bit of a, I would say, scare back in the markets effectively in terms of transiting no disruption to the flows as such. But what I mean is the normalization, which will view a penciling is as through this here, we would start seeing some of this flows, particularly on the refined products normalize in our view, unlikely to come back in the same way where our expectation was at the start of the year.

So it gets basically the timeline of normalization on the Red Sea gets pushed again. So now we are not expecting any of that normalization to occur within the third quarter, fourth quarter. The traffic has improved a bit. It'll stay around these lines and unlikely that we see a full resumption because your war premiums are higher. These two attacks were very significant because you effectively sank these two vessels and you captured some crew as well. So that is effectively what has happened on the Red Sea side, Strait of Hormuz, no expectations of that being disrupted, never say never, but in our view, very low probability and very high risk event. So these are the two ones which we're tracking, and then the function of the market of Shadow Fleet continues to grow higher risk premium, particularly on these two Middle Eastern Gulf and the Red Sea Suez Canal.

And the last one, which I'll talk about is a bit on the freight side as well. So freight markets, again, what we've seen is with the OPEC+ exports coming out, the VLCC market, the bigger tanker market that has got a pretty good, I would say, uplift over the last few months, has more barrels come out, and that's doing extremely well compared to where we were. They did get a bit of a premium from the Strait of Hormuz clashes as well. And if those volumes continue to come into the market, we will see a lot more buoyancy plus a higher flow on the VLCC weight market. The refined product side is a bit subdued for now.

Sambit Mohanty:

Sure. Thanks Rahul. Great insights there. Dan, you're sitting in the Middle East. We are seeing that the Israel, Iran cease fire appears to be holding. What are you hearing from the markets in the Middle East on what's next for the region?

Dan Colover:

Yeah, I think the region's really waiting to see how things are going to pan out. You could say the world's focus has shifted. People in the region are certainly holding their breath. There's still things probably happening behind the scenes or that aren't being publicized going on. The question really is that there are long-term resolution to this situation or to the tension between those two countries, Iran and Israel, and also the proxies as well. We've just heard about the Houthis heating things up again in the Red Sea. You have Russia and Ukraine conflict yet to see a resolution there. You also have a lack of a ceasefire in Gaza. So there's a lot of things happening. We've also got some tensions happening now in Syria in recent days as well. So maybe while the flashpoint between Iran and Israel directly isn't happening right now, there's definitely a lot of things going on in the periphery and also in other countries that could arguably be linked to that underlying tension between Iran and Israel.

Sambit Mohanty:

Sure. That's some nice insights, Dan and thank you so much. We've come towards the end of the podcast, but Rahul, I'll ask you the last question of this podcast, and it's again, going back to a scenario which has the potential to affect oil markets in a big way. And we've seen that US President Donald Trump saying on July 14th that he was imposed hundred percent secondary sanctions on any country purchasing Russian exports. If Russia does not reach a peace agreement with Ukraine within the next 50 days. There is still some time left for this, but how do you think the oil market might be positioning itself ahead of any potential, at least threat of sanctions?

Rahul Kapoor:

We haven't seen that reflected in the pricing, but that is a big one because again, how does India go back from 30, 35% to let's say 5% and below in a short period of time? If both India and in China, China, not that big number, but let's say even China, which has been importing Russian oil as well as India have to replace those barrels. There's no way you can do that in a short period of time. There is no other suppliers, even with OPEC capacity coming online, even with the spare capacity, whatever you bring in, that will have an impact. So that's likely for sure.

And then that links back to higher oil prices, not just for Europe, but for US as well, inflation and so on. So the whole point of the sanctions framework is effectively keeping the Russian oil revenues lower, but letting the oil flow as well as keeping the global oil prices in a check. I think all of that goes out of a window if this thing potential 100% were to come about, I think this could be a negotiation tactic. We know there is in the US trade talks happening plus as well as what NATO has come out and said. So it's all about the geopolitics and then the global oil mix as well as flows right now, and we are closely watching that.

Sambit Mohanty:

Sure, great. Those are extremely valuable insights. Thank you Rahul and Dan for joining me in this conversation. One thing is becoming increasingly clear that even if geopolitics takes an ugly turn, it may not be able to completely overshadow the impact of fast-growing global oil supplies [inaudible 00:23:17].

Rahul Kapoor:

Yes, I think you made a great point, and I'll just add because this is what our oil team also puts out, even with all the disruptions, what's happening, we are in a oil surplus era. What I mean is over the last few years, if you were in deficit, then you certainly have a much higher impact on the price as well as the much higher risk premium. It's effectively being in a surplus area as that cushion is there for the global markets to effectively absorb that spikes.

Sambit Mohanty:

Sure. I mean, saw that amid heightened tensions in the Middle East recently, all markets witness the peak of the fewer premiums when dated Brent reserves past $80 per barrel. But as a global commodity insights have come out with some forecast. Our focus as of now, is that in the third quarter of this year, we expect dated Brent to fall to be around mid-sixties dollars per barrel. And by the end of the year, strong oil supply growth relative to demand is expected to push dated Brent into the fifties. That's the expectation as of now. So we will keep bringing you the updates of prices, supply, and demand as market fundamentals. This podcast is produced by Asia digital editor, Shikha Singh. Thank you for listening.