Oil prices continued their upward climb for the third straight session. Brent crude, the global benchmark, surged past $81 a barrel, a level not seen since late August (per Reuters), while U.S. West Texas Intermediate (WTI) crude followed suit, crossing the $78 mark. A fresh wave of U.S. sanctions targeting Russian oil exports, creating ripples across global markets, led to this surge (read: Should You Buy Oil ETFs on Its Best Weekly Run Since July?).
Game-Changing Sanctions
The U.S. Treasury's latest move to tighten sanctions on Russian oil marked a significant escalation in its efforts to curtail Moscow’s revenue streams. This round of restrictions targeted major players like Gazprom Neft and Surgutneftegas, as well as 183 vessels involved in transporting Russian crude. The intention was probably to disrupt the flow of funds that Russia has relied upon during its conflict with Ukraine.
Backwardation Signals Tight Supply
Market dynamics have shifted too. The Brent and WTI monthly spreads widened to their largest backwardation since late 2024. In such a market, where current prices are higher than future ones, traders see a clear signal: supply is tightening. RBC Capital Markets analysts noted, "The doubling of tankers sanctioned for moving Russian barrels could serve as a major logistical headwind to crude flows," as quoted on Reuters.
Russia’s Balancing Act
Despite the mounting pressure, Russia is not without options. Analysts at JPMorgan believe Moscow could still navigate these sanctions, albeit with difficulty. One route would involve acquiring non-sanctioned tankers; another, offering crude at heavily discounted prices below $60 a barrel to utilize Western insurance under the Group of Seven's price cap. However, such maneuvers might only offer temporary relief.
What Lies Ahead?
Goldman Sachs analysts see the risks to their $70–85 Brent price forecast leaning upward in the near term. They estimate that the vessels affected by the sanctions accounted for 1.7 million barrels per day, or 25% of Russia’s oil exports in 2024—a significant chunk of the market.
Shifting Tides in Global Trade
For years, China and India, the world's largest and third-largest oil importers, had relied heavily on Russian crude, especially after Western sanctions pushed Russian oil away from Europe. Now, with sanctioned tankers off the table, these nations face a scramble to secure alternative supplies. India ETF iShares MSCI India ETF INDA should feel the brunt of this disruptions as the country imports about 80% of its oil requirements.
Middle Eastern, African, and American producers stand to benefit from the reshuffling of trade routes, but this shift won’t come cheap. Shipping costs are expected to soar, further inflating oil prices. United States Brent Oil Fund LP BNO added 4.6% on Jan. 10, 2025.
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United States Brent Oil ETF (BNO): ETF Research Reports
iShares MSCI India ETF (INDA): ETF Research Reports