Oil Futures Take Flight on Russia Sanctions

Oil posted its biggest one-day gain in more than four months after the US announced sanctions on Russia’s biggest oil companies, threatening supplies from one of the world’s top producing countries. 

West Texas Intermediate jumped 5.6% to settle near $62 a barrel, the most since the start of the Israel-Iran conflict on June 13. Heating oil led the oil complex higher, ending the day up 6.8%.

The US blacklisted Russian oil giants Rosneft PJSC and Lukoil PJSC in an effort to cut off revenue Russia needs for its war in Ukraine. Senior refinery executives in India — a key buyer of Russian crude — said the restrictions would make it impossible for flows to continue.

The latest US sanctions are a radical change of policy, where previous efforts to pressure Russia to end the war included a Group-of-Seven price cap on Russian oil that sought to limit revenue for the Kremlin without disrupting supply and causing a spike in global prices.

The step comes at a time when global supply looks plentiful. Nations inside and outside the OPEC+ producer alliance have been ramping up output amid signs of cooling demand growth. If India does drastically cut purchases the question will become whether China, the other top buyer of Russian crude, is willing to step into the void.

“The latest US sanctions on Russia’s largest oil producers represent a significant and unprecedented escalation in Washington’s pressure campaign against Moscow,” said Rystad Energy’s head of geopolitical analysis, Jorge Leon. “Combined with the recent wave of attacks on Russian oil infrastructure, these sanctions raise the prospect of major disruptions to Russian crude production and exports, heightening the risk of forced production shut-ins.”

The European Union also piled additional pressure on the Kremlin with a new package of sanctions targeting Russia’s energy infrastructure, including a full transaction ban on Rosneft and Gazprom Neft PJSC. European diesel and US gasoline futures also jumped.

The oil market has been flashing signs of surplus, with the amount on tankers at sea hitting a record and the International Energy Agency expecting world supply to exceed demand by almost 4 million barrels a day next year. That recently led the forward price curve to signal increasing weakness.

But while abundant supplies may cushion the impact of these sanctions, they shouldn’t be underestimated. Rearranging India’s imports — of which more than a third come from Russia — would be a huge task. The move is also sending shockwaves through China’s oil industry, which imports as much as 20% of its crude from Russia.

Russia has plenty of experience in skirting sanctions and their ultimate impact isn’t yet clear. The country’s seaborne crude shipments recently hit a 29-month high despite a slew of western restrictions since the Ukraine war began. The Rosneft-backed Indian refiner Nayara Energy, for one, could remain an outlet for the country’s barrels. But the pressure on the country has significantly increased.

“India is under pressure to source its oil elsewhere, which is likely to increase demand for non-Russian oil, reduce the oversupply on the oil market, and thus lead to higher oil prices,” said Carsten Fritsch, a commodity analyst at Commerzbank AG. China could potentially buy more Russian oil, and “in that case, the impact of the sanctions on the oil market would be less severe,” he added.

The message from Indian refiners that they probably won’t be able to buy Russian crude anymore is a major shift from a recent signal that they would keep importing, albeit at reduced volumes. President Donald Trump this week said India’s Prime Minister Narendra Modi assured him that the country would wind down its purchases.

Both WTI and Brent bounced back from a five-month low reached on Monday. Futures had also risen on Wednesday on signs the latest selloff was overdone and as US inventories shrank.

Trump, meanwhile, said he planned to speak to Chinese President Xi Jinping about the nation’s buying of Russian oil at a planned meeting next week in South Korea. 

Rosneft, headed by Putin’s close ally Igor Sechin, and privately held Lukoil are the two largest Russian oil producers, jointly accounting for nearly half of the nation’s total exports, according to Bloomberg estimates. Taxes from the oil and gas industries account for about a quarter of the federal budget.

Russia’s oil industry is also under pressure from Ukrainian attacks on refineries, crude pipelines and export terminals that have intensified in recent months. On Thursday, Kyiv claimed a strike on Rosneft’s refinery in Ryazan, one of the biggest in the country. 

What Bloomberg strategists say:

Brent has been able to bounce off the $60/barrel level, showing just how sticky that floor is. With a looming surplus building into winter and macro sentiment cautious, this latest pop is more likely to ease than signal the start of a sustained trend upward.

-Nour Al Ali, Macro Markets & Squawk

The premium that front-month WTI futures command over the next contract, known as the prompt spread, has narrowed in the past few months on mounting concerns over a potential glut. But the spread almost doubled to nearly 60 cents a barrel on Thursday, firming a structure known as backwardation that signals a tight market. 

In Brent options, a measure known as skew flipped to a bullish call bias, while the same gauge for WTI nudged into that territory. 

The upward momentum has spurred commodity trading advisers, which tend to exacerbate price swings, to flip to net long in timespreads for both benchmarks on Thursday, according to data from Bridgeton Research Group. The firm sees continued buying activity from CTAs in the coming sessions.

“This rally offers oil producers another chance to hedge production before the looming supply glut and the US Administration’s push for lower oil prices ahead of the 2026 mid-term elections,” said Citigroup analysts including Eric Lee in a note.

Oil Prices

WTI for December delivery surged 5.6% to settle at $61.79 a barrel in New York.
Brent for December jumped 5.4% to settle at $65.99 a barrel.