The price of oil climbed approximately 2% on Monday, reaching a four-month high, driven by expectations that expanded U.S. sanctions on Russian oil will compel buyers in India and China to seek alternative sources. Brent crude futures saw a $1.25 increase (1.6%), settling at $81.01 per barrel. Meanwhile, U.S. West Texas Intermediate (WTI) crude experienced a $2.25 rise (2.9%), settling at $78.82.
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Record Highs and Market Volatility Signal Supply Concerns
These price surges position Brent for its highest close since August 26th and WTI for its highest close since August 12th. Both benchmarks remain in technically overbought territory for a second consecutive day. The rapid price escalation—Brent and WTI front-month prices have jumped over 6% in the last three trading sessions—has driven time spreads, the premium of front-month contracts over later-dated futures, to multi-month highs. Reflecting heightened market interest, total Brent futures volume on the Intercontinental Exchange reached its peak since March 2020 on January 10th. Open interest and total futures volumes for WTI on the New York Mercantile Exchange also climbed to their highest levels since March 2022.
Sanctions Drive Shift in Global Oil Supply Chains
Chinese and Indian refineries are actively pursuing alternative fuel suppliers in response to new U.S. sanctions targeting Russian producers and tankers. These sanctions aim to curtail the revenue of Russia, the world’s second-largest oil exporter. “Market fears of supply disruption are genuine. The worst-case scenario for Russian oil is increasingly likely,” commented Tamas Varga, an analyst at PVM.
Goldman Sachs estimates that vessels affected by the new sanctions transported 1.7 million barrels per day (bpd) of oil in 2024, representing 25% of Russia’s exports. The bank anticipates its Brent price range projection of $70-$85 to trend upward. “Vessels on the sanctions list will be avoided, and no new positions will be taken,” stated Igho Sanomi, founder of Taleveras Petroleum. Since the announcement of the new sanctions, at least 65 oil tankers are anchored off the coasts of China and Russia, among other locations. Many of these tankers previously facilitated oil shipments to India and China following earlier Western sanctions and the G7 price cap implemented in 2022, which redirected Russian oil trade from Europe to Asia. Some of these vessels have also transported oil from Iran, another nation under sanctions. Six European Union countries have urged the European Commission to lower the G7’s price cap on Russian oil, aiming to reduce Moscow’s war funding without triggering market instability.
Counterbalancing Factors and Market Influences
Factors potentially mitigating the supply risk premium include a potential ceasefire agreement between Israel and Hamas, mediated with the involvement of envoys from both Joe Biden and Donald Trump.
The U.S. dollar reached a 26-month high against a basket of currencies following December’s unexpectedly strong U.S. job growth and a drop in the unemployment rate to 4.1%, raising concerns about potential inflation. This has led traders to reduce expectations for U.S. Federal Reserve interest rate cuts this year. A stronger dollar could dampen energy demand by increasing the cost of dollar-denominated commodities like oil for buyers using other currencies. Higher interest rates, employed to combat inflation, could also curb energy demand by raising borrowing costs and slowing economic growth.
