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US sanctions Rosneft Trading for concealing oil trades with Venezuela

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US sanctions Rosneft Trading for concealing oil trades with Venezuela

Highlights

US State Department 'confident energy markets will remain stable' after Rosneft sanctions

US Treasury gives companies 90 days to wind down deals with Rosneft subsidiary

PDVSA has 677,000 b/d of February crude for sale, but no buyers

Washington — The US imposed sanctions on Rosneft Trading SA, the Geneva-based subsidiary of the Russian state oil company, on Tuesday for supporting Venezuela's oil sector by continuing to trade with sanctions-hit PDVSA, concealing shipments and handling more than half of the country's oil exports, senior US administration officials said during a briefing.

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While the action could have a significant impact on global oil flows, the State Department said it was "confident that energy markets will remain stable."

"Global oil markets are adequately supplied," a senior administration official said. "So while we think this is a serious action, global markets will remain stable."

Related coverage: Could Rosneft sanctions signal the end of Chevron's Venezuela waiver?

During a briefing with reporters, Elliott Abrams, the State Department's special representative for Venezuela, said that ample global supplies will likely prevent an increase in prices, pointing out that oil prices are lower than they were before US sanctions on Venezuela went into effect in January 2019.

"We're not trying to raise oil prices, we're trying to diminish the amount of money available to the Maduro regime," Abrams said.

The sanctions announced helped bolster crude futures Tuesday, with NYMEX front-month crude settling unchanged at $52.05/b, up from an intra-day low of $50.91/b.

Rosneft said in a statement that the latest US sanctions were illegal and unfounded, adding that Treasury has not shown any proof of unlawful activity or "breaches of the one-sided restrictions."

"Sanctions against RTSA are arbitrary and selective because other international companies, including from the US, are carrying out similar activities in Venezuela, and the US regulator has no complaints against them," the statement said.

PDVSA has 677,000 b/d of crude available to sell for February, but no buyers because of US sanctions. That represents 80% of the 850,000 b/d total crude production estimated by PDVSA for February, according to the monthly production plan obtained by S&P Global Platts. However, PDVSA may be forced to reduce its output in the coming months due to the lack of buyers.

For March, PDVSA plans to supply 140,000 b/d of Merey 16 crude to Rosneft, which will have to "decide whether to lift the cargoes or not," a PDVSA source said Tuesday. The company's sales to Rosneft in 2019 also averaged about 140,000 b/d.

WINDING DOWN PERIOD

The Treasury Department gave companies 90 days to wind down activities with Rosneft Trading SA, which was incorporated in Switzerland in 2011 and mainly serves as the trading arm of its parent company, Russian state oil company Rosneft.

US officials said Rosneft Trading last month facilitated a shipment of 2 million barrels of Venezuelan crude to West Africa. They detailed deals last autumn between Rosneft Trading and PDVSA involving 55 million barrels of crude and a shipment last summer for 1 million barrels of Venezuelan crude destined for Asia.

The US also imposed sanctions on Rosneft executive Didier Casimiro, saying he was "critical in bolstering the Venezuelan oil sector" by arranging meetings with PDVSA and officials from the government of President Nicolas Maduro to strengthen the partnership between Rosneft and PDVSA.

"This is a reaction to the growing and increasingly central role of Rosneft in the affairs of Venezuela, particularly in the course of the last year," an administration official said. "Rosneft Trading is now handling very much over half of the oil coming out of Venezuela and actively evading sanctions, engaging in ruses, engaging in deception, engaging in ship-to-ship oil transfers in a direct effort to change the identity of the oil and hide it from purchasers. Those are kinds of activities that a major international oil company should never engage in."

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The US administration expects the global financial sector to "back away" from Rosneft Trading as a result of the sanctions. "We've seen that the impact of such designations goes far beyond the US-based businesses of these entities," another senior official said.

Abrams with the State Department indicated that additional sanctions against Rosneft were being considered.

"There will be more steps and further pressure in the coming weeks and months," he said.

POTENTIAL MARKET IMPACT

In August, a senior Trump administration official told S&P Global Platts the US was prepared to impose sanctions on Rosneft if it continued to trade in crude oil and fuel with PDVSA, but those sanctions remained on hold for months due to the potential impact they could have on the global oil market.

The sanctions announced Tuesday were carefully crafted to minimize the "ripple effect" of Rosneft sanctions on the global market, an administration official told Platts on Tuesday.

"There comes a point where you have to do something different," the official said.

Analysts said that the White House likely felt current market conditions, with the coronavirus outbreak weighing on global demand and oil prices at their lowest point since 2018, were the best opportunity to announce them. While the administration is broadly concerned about the impact on oil markets, President Donald Trump is particularly concerned about the impact any sanctions might have on domestic gasoline prices during a presidential election year, analysts said.

Kevin Book, managing director with ClearView Energy Partners, said the 90-day phase-in will likely temper much of the market reaction to the sanctions.

"There's a lot of room for uncertainty with this and banks freeze first and ask questions later," Book said.

Even with the phase-in period, the new sanctions could still create complications for the global market.

US Gulf Coast refiners, for example, have ramped up imports of Russian residuum in response to sanctions on imports of Venezuelan crude oil.

US imports of unfinished oils from Russia averaged 472,000 b/d in November, the most since May 2013, when the same amount of unfinished oils was imported from Russia, according to the US Energy Information Administration. Imports of Russian unfinished oils accounted for two thirds of total unfinished oil imports by the US in November, compared with about a third of all unfinished oils imports in November 2018, according to EIA.