Market News

(Bloomberg) -- Oil rallied to a five-month high as a fresh wave of US sanctions against Russia’s energy industry threatened to crimp supplies from one of the world’s top producers.

West Texas Intermediate advanced 3% to near $79 a barrel. The US imposed its most aggressive and ambitious sanctions yet on Russia’s oil industry last week, targeting large exporters, insurance companies and more than 150 tankers. A group of European Union nations intend to follow suit by introducing further restrictions on natural gas and bolstering the enforcement of a price cap on oil.

WTI’s prompt spread — the diference in price between barrels for first and second month delivery — traded at the highest since August in a sign of near-term bullishness.

The new sanctions — coming just before US President-elect Donald Trump takes office — throw a spotlight on India and China, with refiners potentially being forced to seek alternative supplies. India emerged as a vital buyer of Russian crude after Moscow’s 2022 invasion of Ukraine, and China is the world’s largest oil importer.

“New US sanctions on Russia’s oil industry went further than expected,” Morgan Stanley analysts including Martijn Rats wrote. “It will take some time to digest these measures, but this creates downside risks to oil supply, at least for a period.”

In China, independent refiners in Shandong held emergency meetings to try and work out if they could still take delivery of crude en route when the penalties were announced, traders said. In India, refinery officials said they were bracing for major disruption, which could last up to six months, and the country plans to reject tankers that were sanctioned by the US.

Crude has had a strong start to the year, with gains spurred by colder weather, falling US stockpiles and speculation that Trump officials may tighten curbs against flows from Iran in the coming months.

The broad sanctions package from the outgoing Biden administration threatens to bring fresh disruption, potentially changing the market framework for OPEC+ as the alliance plans to start loosening output curbs later this year after a series of delays.

What Bloomberg strategists say...

“This isn’t the first time markets have braced for supply disruptions, but the scale and scope of these sanctions introduce greater risks. If enforcement intensifies or geopolitical tensions escalate, the bearish outlook for oil could quickly shift, giving bulls a shot at reclaiming the narrative for 2025.”

— Read the full note from Markets Live editor Nour Al Ali here.

The jump in prices may also provide a challenge for central bankers, including the Federal Reserve, if it leads to stickier inflation. Investors have been scaling back expectations for the pace of interest-rate cuts from the Fed this year, with the US economy proving to be robust and price pressures lingering.

While it remains uncertain how the curbs will impact actual flows of crude for producers, shippers, traders and users, some early signs of disruption were apparent. Three tankers carrying more than 2 million barrels of Russian oil were floating in waters off eastern China after they were sanctioned.

Among banks, Citigroup Inc. said that up to 30% of Russia’s so-called shadow fleet of tankers could be affected, threatening as much as 800,000 barrels a day, although the effective loss may be less than half that. Goldman Sachs Group Inc. said it hadn’t changed its expectations for Russian supply as crude could be priced even more cheaply to incentivize buying.

The wider OPEC+ alliance, which includes Russia, has been planning to revive production in stages from April after a series of deferrals, and its members have substantial spare capacity at their disposal.

“Even if OPEC+ does not respond immediately to potential supply disruptions, they are expected to begin unwinding production cuts in April, which could help buffer extreme price rallies, especially if Brent prices climb above $85,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Group.

The relative strength index also showed prices at overbought levels, a reading that indicates crude is due for a pullback.