Oil prices increased by about 2% on Monday, reaching a four-month high as expectations grew that expanded U.S. sanctions on Russian oil would compel buyers in India and China to seek alternative suppliers.
Key Highlights:
Price Movements:
Brent crude futures rose by $1.25 (1.6%) to settle at $81.01 a barrel.
U.S. West Texas Intermediate (WTI) crude increased by $2.25 (2.9%) to settle at $78.82.
This marks Brent’s highest close since August 26 and WTI’s highest close since August 12.
Market Dynamics:
Both Brent and WTI benchmarks have remained in technically overbought territory for two consecutive days.
The premium of front-month contracts over later-dated futures, known as time spreads, has surged to its highest level in several months, reflecting increased market interest.
Total futures volume for Brent on the Intercontinental Exchange reached its highest level since March 2020 on January 10. Open interest and futures volumes for WTI also hit their highest since March 2022.
Supply Concerns:
Analysts express genuine fears regarding potential supply disruptions, with PVM analyst Tamas Varga noting that the worst-case scenario for Russian oil could become a reality.
Goldman Sachs estimates that vessels targeted by the new sanctions transported 1.7 million barrels per day (bpd) of oil in 2024, accounting for 25% of Russia’s exports.
Sanctions Impact:
At least 65 oil tankers have anchored off various locations, including the coasts of China and Russia, since the announcement of the new sanctions package, which has shifted Russian oil trade from Europe to Asia.
Some tankers are also involved in transporting oil from Iran, which is similarly under sanctions.
European Union Response:
Six EU countries have urged the European Commission to lower the price cap on Russian oil imposed by the G7, arguing that it would help reduce Moscow’s revenue without causing market shocks.
Factors Weighing on Oil Prices:
Potential Peace Deal:
Mediators have presented a final draft deal to end the conflict between Israel and Hamas, which could alleviate some supply risk premiums in the oil market.
Currency Fluctuations:
The U.S. dollar has reached a 26-month high against a basket of currencies, influenced by unexpected job growth and a declining unemployment rate. This could lead to higher inflation and impact energy demand.
A stronger dollar makes oil more expensive for buyers using other currencies, potentially reducing demand.
Interest Rate Speculations:
As traders reassess the likelihood of interest rate cuts from the U.S. Federal Reserve, expectations have shifted, with markets no longer fully pricing in even one rate cut for 2025.