Oil prices climb 2% to 4-month high on expected hit to China and India’s Russian supplies

Oil prices climbed about 2% to a four-month high on Monday on expectations that wider U.S. sanctions on Russian oil would force buyers in India and China to seek other suppliers.

Brent futures rose $1.40, or 1.8%, to $81.16 a barrel by 11:18 a.m. EST (1618 GMT), while U.S. West Texas Intermediate (WTI) crude rose $2.15, or 2.8%, to $78.72.

That put Brent on track for its highest close since Aug. 26 and WTI on track for its highest close since Aug. 12, and kept both benchmarks in technically overbought territory for a second day in a row.

Moreover, with Brent and WTI front-month prices rising around 7% over the past three trading sessions, the premium of front-month contracts over later-dated futures, known in the energy industry as time spreads, soared to their highest in several months.

The U.S. Treasury imposed wider sanctions on Russian oil producers late last week, including Gazprom Neft and Surgutneftegaz, as well as 183 vessels that have shipped Russian oil, targeting revenue Moscow has used to fund its war with Ukraine.

Analysts and energy traders said the sanctions will push China and India to source more crude from the Middle East, Africa and the Americas, boosting prices and shipping costs.

"There are genuine fears in the market about supply disruption. The worst case scenario for Russian oil is looking like it could be the realistic scenario," said PVM analyst Tamas Varga. "But it’s unclear what will happen when Donald Trump takes office next Monday."

Goldman Sachs estimated that vessels targeted by the new sanctions transported 1.7 million barrels per day (bpd) of oil in 2024, or 25% of Russia's exports. The bank is increasingly expecting its projection for a Brent range of $70-$85 to skew to the upside.

"No one is going to touch those vessels on the sanctions list or take new positions," said Igho Sanomi, founder of oil and gas trading company Taleveras Petroleum.

At least 65 oil tankers have dropped anchor at multiple locations, including off the coasts of China and Russia, since the U.S. announced the new sanctions package.

RUSSIAN PRICE CAPS

Many of the tankers named have been used to ship oil to India and China after previous Western sanctions, and a price cap imposed by the Group of Seven countries in 2022 shifted trade in Russian oil from Europe to Asia. Some of the ships have also moved oil from Iran, which is under sanctions as well.

Analysts at JPMorgan said Russia had some room to manoeuvre despite the new sanctions, but it would ultimately need to acquire non-sanctioned tankers or offer crude at or below $60 a barrel to use Western insurance as stipulated by the West's price cap.

Six European Union countries called on the European Commission to lower the price cap put on Russian oil by G7 countries, arguing it would reduce Moscow's revenue to continue the war while not causing a market shock.

In addition to rising oil prices due to Russian sanctions, other energy futures also were soaring as extreme cold in the U.S. boosted demand for heating fuels. Futures were trading near a two-year high for U.S. natural gas and a six-month high for U.S. diesel. [NGA/]

U.S. gasoline prices, however, have not gained as much as other energy futures, cutting the gasoline crack spread, which measures refining profit margins, to its lowest since October 2023.