Crude Pauses Near Two-Week High

Oil steadied, holding near a two-week high, as traders assessed whether fresh US sanctions on Russia’s biggest producers could counter a looming global surplus.

West Texas Intermediate ended the day little changed near $61 a barrel, up 7% this week, after the the US blacklisted Russia’s Rosneft PJSC and Lukoil PJSC in an effort to cut off revenue Moscow needs for its ongoing war in Ukraine. Russian oil flows to major purchaser India are expected to plunge while Chinese state-owned companies have canceled some purchases.

Trend-following funds are also adding long positions, reinforcing the short squeeze in oil.

“Barring a downside shock, every scenario will result in large-scale algorithmic buying activity over the coming trading sessions,” said Dan Ghali, senior commodity strategist at TD Securities.

The European Union also piled additional pressure on the Kremlin with a package of sanctions targeting Russia’s energy infrastructure, including a full transaction ban on Rosneft and Gazprom Neft PJSC. The measures come as the oil market faces a significant 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.

“Overall, we estimate that between 500,000 to 600,000 barrels per day of Russian oil production is at risk of being curtailed,” said Janiv Shah, a vice president at Rystad Energy.

Kuwait’s oil minister said OPEC is prepared to increase production if demand requires it. Chinese firms have already halted purchases of some spot cargoes — mostly ESPO, a grade from Russia’s Far East — according to people with knowledge of the situation. President Donald Trump plans to speak to his counterpart Xi Jinping about the China-Russia oil trade during a meeting next week.

Meanwhile, India’s Reliance Industries Ltd., a major Russian oil importer, has bought millions of barrels of crude from the Middle East and US. The processor does typically purchase Middle Eastern grades, but the recent buying — including some transactions prior to the US sanctions — has been more active than usual, traders said.

Forward curves for crude are also showing signs of increased supply pressure. The premium of front-month WTI futures over the next contract — known as the prompt spread — has significantly widened since the start of the week, firming a structure known as backwardation that typically signals a tight market.

Russia anticipates a hit to its budget, but the country — which has plenty of experience skirting sanctions — will deploy its network of traders and shadow tankers to limit the financial impact, according to an official close to the Kremlin. Rosneft, headed by President Vladimir Putin’s close ally, Igor Sechin, and Lukoil are the country’s two largest producers.

Russia also faces Ukrainian attacks on its energy infrastructure. The country’s General Staff recently claimed a strike on Rosneft’s refinery in Ryazan.

Oil Prices

WTI for December delivery dipped near 0.5% to settle at $61.50 a barrel in New York.
Brent for December settlement slipped about 0.1% to settle at $65.94 a barrel in London after jumping 5.4% on Thursday.