The United States and the European Union have been reluctant to slap sanctions on Russia's oil and gas exports since Putin invaded Ukraine, as the Western allies are concerned about the repercussions on Europe's energy supply and skyrocketing oil and gasoline prices.
Still, potential sanctions on Russian energy exports are not off the table. If the West bans Russian oil, international crude prices could skyrocket to $150 per barrel, analysts say.
But even in the event of no sanctions on Russian oil, prices are set to remain very high and jump higher still because buyers and refiners are in a "self-sanctioning" mode, not daring to touch Russian crude and looking for alternative supplies. The possibility of an Iranian nuclear deal that would allow Iran to legitimately return to exporting its oil is a potential drag on oil prices, but barrels from the Islamic Republic cannot replace the loss of Russian oil, analysts say.
"While some remain transfixed with the idea that an Iran agreement will provide much needed relief (from rising oil prices), we again caution that the deal is still not done and the sums entailed would simply be too small to backfill a major Russian disruption," RBC Capital analyst Helima Croft wrote in a note cited by Reuters on Thursday.
There is already disruption in Russian oil exports as Moscow meets mounting challenges in selling its seaborne crude and oil products, with traders, refiners, banks, insurers, and tanker owners unwilling to touch anything coming out of Russia.
Russia's invasion of Ukraine was met with a severe sanctions response from the U.S., the EU, and the UK. The Western allies kicked several Russian banks out of the international SWIFT system, and although direct sanctions on Russia's oil and gas are not (yet) implemented, trade in Russian commodities has become toxic for many global players.
"Because of the banking sanctions we've estimated about 70% of Russian crude oil exports can't be touched. That's about 3.8 million bpd," Amrita Sen, Director of Research at Energy Aspects, told CNBC on Wednesday.
Russia's crude and refined product exports have dropped by one-third, or by 2.5 million bpd, this week, according to estimates from Energy Intelligence based on shipping data and interviews with traders.
Oil market participants have started to realize that a lot of Russian oil could be off the market in the near future—even if the West doesn't impose direct sanctions on Russian oil—adding to the already tight market balances.
The oil market seems to believe that sanctions on Russian oil are coming, John Kilduff, partner at Again Capital, told CNBC this week.
"These are barrels that we cannot make up, so that's why this market is on tenterhooks," Kilduff said.
Sanctions on oil from Russia—which exports around 5 million bpd of crude and 2.8 million bpd of refined products—would have a much bigger effect on market balances compared to the sanctions on Iran and Venezuela of the previous years, analysts say.
Yet, even without direct sanctions, buyers have started to "self-sanction" themselves, as analysts say.
Refiners have started to replace Russian crude. Some of the biggest U.S. importers of Russian crude oil have started suspending their purchases of the commodity, including Monroe Energy, the third-biggest U.S. buyer of Russian oil.
Neste of Finland said on Tuesday, "Due to the current situation and the uncertainty in the market, Neste has mostly replaced Russian crude oil with other crudes, such as North Sea oil." Neste is preparing "for various options in procurement, production and logistics."
On Wednesday, Portugal's energy group Galp said that it was suspending all new purchases of petroleum products either sourced in Russia or from Russian companies.
"Our decision is simple: Galp will not contribute to finance war," the company said.
Meanwhile, in Russia, Surgutneftegaz hasn't been able to award spot cargoes in three consecutive tenders over the past week, as no one is bidding even at the huge discounts of the Urals grade to Dated Brent.
Russian oil flows are already disrupted by the existing sanctions and even if direct sanctions on oil don't follow, the market will struggle to replace barrels already lost to "self-sanctioning," even if Iran returns to exporting crude soon.
By Tsvetana Paraskova for Oilprice.com