Stranded Sanctioned Oil Is Repricing Petroleum Derivatives

Enerdealers Editorial

From Floating Storage To Pricing Shock

Over the past year, a growing fleet of tankers loaded with Russian, Iranian and other sanctioned barrels has turned large parts of the global ocean into de‑facto floating storage. Estimates from ship‑tracking firms suggest that close to 300 million barrels of Russian and Iranian crude alone are currently “stranded” on the water, roughly 50% more than a year ago. At the same time, broader crude and product inventories are rising onshore, with agencies such as the EIA and IEA projecting sizeable global surpluses into 2026.

In a textbook market, such inventory builds would normally pressure flat prices and narrow product cracks. Instead, benchmark Brent has risen by double‑digit percentages since the start of 2026, while cracks for key products like diesel and jet fuel remain supported by fear of disrupted flows rather than outright scarcity. Traders, refiners and hedgers are increasingly dealing with a “bifurcated” oil system, where a large pool of discounted, high‑risk barrels is effectively segmented from the mainstream market by sanctions, financial restrictions and logistical constraints. That segmentation is feeding directly into petroleum derivatives: from outright futures to cracks, spreads, and complex structured products used by physical traders.

For market participants buying and selling paper barrels, the key challenge is no longer just estimating total supply; it is assessing how much of that supply can actually clear into compliant demand at any given time. The answer to that question is what is increasingly driving the behaviour of petroleum derivatives prices today.

The accumulation of stranded barrels is a direct consequence of stepped‑up sanctions and enforcement, particularly by the United States and European Union.

Stranded Barrels At Sea: The New “Hidden Inventory”

Floating storage has always been a feature of the oil market, typically used opportunistically when contango structures make it profitable to store crude on tankers. What is different now is that a large share of the oil being held at sea is not there for purely commercial timing reasons but because it cannot easily find a buyer under existing sanctions and enforcement regimes.

Analysts using data from Vortexa, Kpler and OilX have highlighted that a disproportionately high share of recent growth in “oil on water” comes from sanctioned or opaque origins such as Russia, Iran and Venezuela. In some estimates, between 20% and 40% of the increase in seaborne inventories since late 2025 is tied to such barrels. For Russian and Iranian crude specifically, ship‑tracking data now point to roughly 292 million barrels on the water, almost double year‑earlier levels for Russian volumes and a similar surge for Iranian oil.

These barrels are often carried by a so‑called “shadow fleet”: older tankers with opaque ownership structures, non‑Western insurance and frequently incomplete AIS (Automatic Identification System) signalling. Their operators attempt to circumvent sanctions by ship‑to‑ship transfers, flag‑hopping and route obfuscation, but they still face growing risks of seizure, denial of port services, or future resale problems if regulatory pressure tightens further. The result is a quasi‑inventory that exists in physical terms, but whose effective availability to mainstream refiners is far below headline numbers.​

For derivatives traders, this creates a new category of non‑fungible supply: crude counted in global balances but heavily discounted by location, legal risk, financing conditions, and time‑to‑market. The more these barrels accumulate on water instead of clearing into refiners, the more the marginal barrel that sets prices for benchmarks and crack spreads comes from non‑sanctioned sources.

For derivatives traders, this creates a new category of non‑fungible supply

Sanctions, Enforcement And The Rising Risk Premium

The accumulation of stranded barrels is a direct consequence of stepped‑up sanctions and enforcement, particularly by the United States and European Union. Since 2022, successive sanctions packages and price‑cap mechanisms have targeted Russian exports, while parallel measures and long‑running restrictions have constrained flows from Iran and Venezuela. What has changed recently is not the existence of these sanctions, but their tightening enforcement: more active monitoring of price‑cap compliance, heightened scrutiny of shipping, and an increased willingness to target individual tankers and service providers.​

This regulatory escalation has introduced a persistent geopolitical risk premium into crude and product prices. Even as demand growth has slowed and agencies anticipate oversupply, Brent futures in early 2025 were already trading around 12% higher than in late 2024, with analysts attributing 5–10 USD per barrel of that move to sanctions‑related uncertainty and disrupted supply chains. By early 2026, the IEA noted that global oil demand growth was decelerating while prices remained roughly 14% higher year‑to‑date, a combination that underscores the importance of risk premia rather than pure fundamentals.

This premium has several components that matter for derivatives:

• Legal and compliance risk: Refineries, traders and banks must price the probability that a cargo could be seized, a payment blocked, or a counterparty sanctioned mid‑voyage.​

• Shipping and insurance costs: With a portion of the fleet effectively removed from mainstream service or diverted into shadow operations, day rates for compliant tankers remain elevated, especially for long‑haul routes.​

• Duration risk: Longer and more circuitous routes for sanctioned or re‑routed barrels increase tonne‑mile demand, tying up tankers for longer and amplifying the impact of any marginal disruption.​

All three factors translate into higher costs for deliverable barrels into key benchmarks and hubs, which in turn support paper prices even in the face of robust inventory builds.

Northwest Europe and Singapore are driven less by global balances and more by the availability of compliant feedstock and export routes

Physical Dislocations And The “Bifurcated” Market

From a trading perspective, sanctions and floating storage have split the global market into two overlapping but distinct spheres. On one side is the “clean” market anchored around benchmarks such as Brent and WTI, supplied by Middle Eastern OPEC members, U.S. shale, North Sea producers and other mainstream exporters. On the other side is a discounted, higher‑risk pool of sanctioned barrels, largely moving through the shadow fleet to buyers with greater tolerance for regulatory exposure.​

This bifurcation shows up clearly in price differentials. Sanctioned grades from Russia and Iran trade at steep discounts to Brent, reflecting both their limited buyer base and the embedded costs of opaque logistics and finance. At the same time, traditional customers that have scaled back purchases of these barrels—particularly in Europe and parts of Asia—are forced to compete more aggressively for Middle Eastern, U.S. and West African supplies. For refined products, this means that crack spreads in key hubs such as Northwest Europe and Singapore are driven less by global balances and more by the availability of compliant feedstock and export routes.​

In practice, this segmentation severs the link between total barrels in the system and the prices that clear in derivatives markets:

• Crude on stranded tankers contributes to global inventory statistics but does not directly ease tightness in compliant markets.

• Refiners that do not wish—or are not allowed—to touch sanctioned barrels must bid up alternative supplies, effectively ignoring discounted oil even when it is visible on tracking systems.

• Derivatives used for hedging and speculation are mostly linked to benchmark streams, so their pricing reflects the tighter sphere, not the broader universe of “inaccessible” barrels.

This is why the accumulation of stranded oil can coincide with rising petroleum derivatives prices: the marginal barrel that matters for pricing is not the cheapest on the water, but the most accessible and compliant.

The stranded barrels consumes shipping capacity without necessarily increasing effective supply to major hubs.

Freight, Time Spreads And The Cost Of Carry

The shadow fleet and stranded inventory also feed into the structure of futures curves, particularly time spreads, through their impact on freight and the cost of carry. Normally, a steep contango (where future prices are higher than spot) can incentivise traders to store crude either onshore or on tankers, capturing the spread between prompt and deferred prices after deducting storage and finance costs. When tanker rates are relatively low, floating storage can be a flexible extension of land‑based tanks.​

Today, however, tanker markets are tight. With a significant number of vessels dedicated to moving sanctioned oil or taken out of the mainstream pool due to sanctions risk, available tonnage for conventional routes is reduced. Industry sources report elevated daily hire rates for very large crude carriers (VLCCs) and other tanker classes, and expect strong freight markets to persist into at least the first half of 2026. For traders, this translates into higher costs for both spot cargo movements and floating storage strategies, raising the hurdle for any contango play and reinforcing backwardation (where prompt prices are higher than deferred) when supply fears dominate.​

The stranded barrels exacerbate this dynamic because they are not simply parked in place; many are engaged in slow‑steaming, ship‑to‑ship transfers, and circuitous routes designed to obscure origin. That consumes shipping capacity without necessarily increasing effective supply to major hubs. When traders model time spreads and cost‑of‑carry economics, they must now incorporate:​

• Higher and more volatile freight rates, particularly on sanctioned‑adjacent routes.​

• Longer voyage times, increasing working capital needs and exposure to price moves.​

• The risk of sudden re‑routing if a tanker is denied port access or targeted by enforcement actions.​​

These factors raise the cost of holding physical barrels relative to paper positions, which can support prompt prices and the valuation of near‑dated derivatives even when aggregate inventories would suggest a softer market.

Petroleum derivatives linked to refined products —gasoline, diesel, jet fuel, fuel oil and others— are especially sensitive to the current dislocations

Product Cracks: Why Derivatives Lead Fundamentals

Petroleum derivatives linked to refined products —gasoline, diesel, jet fuel, fuel oil and others— are especially sensitive to the current dislocations because they sit at the intersection of crude availability, refining capacity and trade routes. In recent quarters, global data show that product inventories have risen alongside crude, yet cracks in key hubs have not collapsed as aggressively as a simple balance sheet might imply. Part of the explanation lies in localised shortages and logistical bottlenecks, but the stranded‑oil phenomenon has amplified these issues.

Because a significant chunk of Russian and Iranian crude is effectively quarantined on the water or constrained to a narrow set of buyers, refiners in Europe, parts of Asia and Latin America rely more heavily on Middle Eastern, U.S. Gulf Coast and West African feedstock. When shocks hit any of these alternative supply chains —weather disruptions in the U.S. Gulf, geopolitical flare‑ups in the Middle East, or technical issues at key refineries— the marginal barrel of product becomes extremely sensitive to incremental changes in throughput or export availability.

Derivatives markets, which allow traders to express views on these marginal changes, often move ahead of observed shifts in inventories:

• Diesel cracks can widen sharply on expectations that sanctions enforcement will force more Russian product into opaque channels, reducing supply to compliant importers even if exports from Russia do not fall immediately.

• Jet fuel cracks may spike when key refining hubs are expected to divert yields towards gasoline or middle distillates in response to changing margins, especially if alternative crude supplies look uncertain.

• Fuel oil and vacuum gasoil derivatives can react to anticipated changes in blending and upgrading demand tied to the availability of certain heavy or sour crude grades trapped in floating storage.

In all these cases, the underlying driver is not absolute product scarcity, but concerns about deliverability of the right molecules to the right markets under tightening sanctions and shipping constraints. The more oil that is stranded or shunted into opaque channels, the more sensitive product derivatives become to marginal disruptions elsewhere.

Stranded oil has made basis risk the central concern for many trading books.

Trading Strategies In A Fragmented Market

For physical and paper traders, the current environment is both an operational challenge and an opportunity. The fragmentation of the market into compliant and shadow spheres widens basis differentials, enhances location spreads, and creates persistent volatility in cracks and time spreads —all of which can be monetised by sophisticated participants.​

Key strategies emerging in response to stranded oil and sanctions include:

• Benchmark arbitrage: Traders look for mis‑pricings between benchmark futures (such as ICE Brent) and regional grades whose fundamentals are more directly impacted by the absence of Russian or Iranian barrels.

• Location and freight plays: Elevated tanker rates and route disruptions create opportunities in cross‑basin arbitrage, where traders lock in margins by combining freight derivatives, physical charters and paper hedges in crude and product futures.​

• Crack and refinery margin optimisation: Refiners and merchant traders use swaps and options on product cracks to navigate volatile margins caused by fluctuating access to feedstock, especially where sanctions limit traditional supply chains.

• Optionality around stranded barrels: Some niche players specialise in handling sanctioned‑adjacent flows, pricing in the legal and operational risk to capture steep discounts while hedging price exposure via mainstream benchmarks.​

At the same time, the risk management burden has increased drastically. Compliance teams must track evolving sanctions lists, shipping advisories and insurance restrictions almost in real time, while risk managers integrate these non‑price factors into value‑at‑risk models and stress tests. Derivatives positions that would once have been considered straightforward hedges —such as selling Brent futures against Russian physical exposure— now carry additional basis and execution risk if enforcement disrupts the underlying flows.​

In effect, stranded oil has made basis risk the central concern for many trading books. Traders can no longer assume that correlations between benchmarks and specific physical streams will hold under stress, especially when those streams are one regulatory decision away from being frozen on the water.

International Context: Oversupply On Paper, Tightness In Practice

Global agencies such as the EIA and IEA currently project a world that looks comfortably supplied, at least on paper. The EIA’s recent outlooks highlight expected inventory builds averaging more than 2 million barrels per day in late 2025 and a surplus of around 1.6 million barrels per day across 2026, with Brent prices forecast to trend lower towards the low‑50s USD per barrel range. The IEA similarly anticipates a sizeable surplus for 2026 and inventories at four‑year highs.

Yet spot and near‑dated futures prices do not fully reflect this bearish narrative. Oil has not collapsed to the levels implied by pure supply‑demand balances; instead, it trades with swings driven by headlines about sanctions, tanker seizures, Middle East tensions and enforcement actions against shadow fleet vessels. This divergence between “paper balances” and market pricing is a direct outcome of the stranded‑barrel problem.​

Several structural factors underpin this disconnect:

• The share of global supply affected by sanctions is large enough that any incremental tightening or loosening of enforcement changes the effective availability of fungible barrels.

• The geographic redistribution of flows—away from Europe towards Asia, for example—lengthens supply chains and increases the system’s sensitivity to shipping bottlenecks.​

• Expectations of future policy shifts, such as additional sanctions packages or secondary sanctions on third‑country intermediaries, feed into today’s risk premia and derivatives pricing.

In this environment, derivatives markets serve less as a straightforward reflection of immediate fundamentals and more as a barometer of geopolitical risk and accessibility of supply. Traders must read not only balance sheets and refinery runs, but also regulatory calendars, diplomatic signals and enforcement patterns.

Looking Ahead: What Could Unlock The Stranded Oil?

The future path of petroleum derivatives prices will hinge in large part on what happens to the barrels now stranded at sea. Several broad scenarios can be imagined:

• Tightening sanctions and enforcement: If Western governments continue to escalate sanctions, target more vessels and clamp down on evasion networks, the pool of stranded oil could grow further. That would likely sustain or even increase the current risk premia, keeping benchmark and product derivatives elevated relative to underlying balances.​

• Gradual accommodation via new channels: Alternatively, non‑Western buyers might develop more robust financial and logistical systems to absorb stranded barrels, reducing the share of truly unusable oil. If this happens, discounts on sanctioned grades could narrow, and the segmentation between markets might soften, eventually exerting downward pressure on derivatives linked to mainstream benchmarks.​

• Policy reversals or negotiated relief: Any major geopolitical breakthrough—such as a détente that leads to partial sanctions relief for one of the key producers—could trigger a wave of selling from floating storage, abruptly swelling supply into conventional markets. In that case, time spreads and cracks could compress rapidly, with contango structures re‑emerging and tanker rates adjusting as flows normalise.

For now, industry commentary suggests that sanctions are more likely to tighten than to be rolled back, and that enforcement will remain a central tool of foreign policy. That implies a continued environment of elevated derivatives prices relative to what headline supply and demand numbers might otherwise justify.

Conclusions

The current rise in petroleum derivatives prices is not simply a story of demand resilience or OPEC+ discipline; it is fundamentally about barrels that exist physically but are constrained legally and logistically. Hundreds of millions of barrels of sanctioned Russian, Iranian and other crude now circulate in a semi‑visible loop of floating storage and shadow fleet operations, effectively removed from the universe of readily deliverable supply that sets prices for benchmarks and refined products.​

This stranded oil amplifies basis risk, inflates freight and cost‑of‑carry, and embeds a persistent geopolitical premium in derivatives linked to crude and petroleum products. Refiners, traders and end‑users operating in compliant markets face higher and more volatile prices even as global agencies point to rising inventories and projected surpluses. For trading desks, success in this environment depends less on forecasting aggregate balances and more on understanding segmentation, sanctions enforcement and the evolving geography of risk.

As long as a large share of global supply remains effectively stranded at sea, the disconnection between physical abundance and derivatives pricing is likely to persist. Petroleum derivatives will continue to trade not just on barrels in tanks and on ships, but on the probability that those barrels can legally and safely reach the markets that need them.

Sources

• Vortexa, Kpler, OilX ship‑tracking and “oil on water” analyses for Russian, Iranian and Venezuelan barrels, 2025–2026.

• EnergyConnects: “Oil Trading Giants Say Western Sanctions Driving Up Prices” (International Energy Week coverage, February 2026).​

• LinkedIn News brief: “Sanctions and stranded oil shipments are driving up prices” (February 2026).​

• Investing.com UK: “Crude Oil: Floating Storage Surge Puts Market Balance on Edge” (November 2025).​

• AInvest: “Geopolitical Risk and the New Oil Paradigm: How U.S. Sanctions on Russia are Reshaping Global Markets” (July 2025).​

• Reuters and S&P Global coverage of EIA outlook: inventory builds and Brent price forecasts for 2025–2026.

• EBC / market commentary on IEA 2026 surplus and oil price forecast ranges.​

• Reuters: “Oil tanker rates to stay strong into 2026 as sanctions remove ships from hire” (December 2025).​

• CNBC video and explainer: “How Sanctioned Oil Reaches Global Markets” (February 2026).​

• Bloomberg: “Oil’s Billion-Barrel Buildup at Sea Points to Sanctions Stress” (November 2025).​