Oil prices saw a slight decline on Tuesday, retreating from a four-month peak driven by recent U.S. sanctions on Russian oil exports and anxieties regarding potential supply disruptions.
As of 20:02 ET (01:02 GMT), Brent oil futures decreased by 0.3 percent to $80.77 per barrel, while crude oil WTI futures for March also fell by 0.3 percent, reaching $77.12 per barrel. This follows a rally in the previous two sessions, culminating in a four-month high the day before. The surge was largely influenced by the Biden administration’s introduction of its most extensive sanctions package on Friday, aimed at undermining Russia’s oil and gas revenue streams.
Impact of U.S. sanctions on Russian oil
The latest U.S. Treasury measures specifically target significant Russian oil producers, including Gazprom Neft and Surgutneftegas, along with 183 vessels involved in the transportation of Russian oil. These developments are anticipated to substantially disrupt Russian oil exports, pushing major importers like China and India to explore alternative suppliers in regions such as the Middle East, Africa, and the Americas. This transition raises concerns about tightening supply and the likelihood of increased demand from other sources. Analysts speculate that Russia may need to price its crude below $60 per barrel to maintain competitiveness, impacting overall market dynamics.
Bernstein analysts noted, “New sanctions could push the price of Brent up to $90 per barrel for prompt delivery,” highlighting the potential volatility in the oil market.
Read more: Oil prices surge to $81.22 due to potential supply disruptions, cold weather
Strong dollar’s influence on oil prices
On Tuesday, the U.S. dollar remained robust, with the US Dollar Index reaching its highest level in over two years. A stronger dollar can make oil more expensive for buyers using weaker currencies, often leading to reduced demand in non-dollar-denominated economies. This dynamic can exert downward pressure on global oil prices. While commodities like oil can attract speculative investment during periods of dollar weakness, a strong dollar may cause traders to shift towards safer assets, such as U.S. Treasury bonds, consequently lowering speculative demand for crude oil.
Oil prices had surged on Monday, continuing the upward momentum from last week as markets reacted to the anticipated supply disruptions following stringent U.S. sanctions on Russian oil exports. As of 20:35 ET (01:35 GMT), Brent oil futures rose by 1.8 percent, reaching $81.22 per barrel, while WTI futures for March increased by 1.7 percent to $77.06 per barrel. On Friday, prices had already jumped nearly 3 percent, marking their highest levels in three months.
Consequences of U.S. sanctions on Russian oil exports
The Biden administration’s sanctions package aims to diminish Russia’s oil and gas revenues, which are believed to support its ongoing conflict in Ukraine. The measures specifically target major producers like Gazprom Neft and Surgutneftegas, alongside 183 vessels engaged in transporting Russian oil. Analysts predict that these sanctions will significantly impact Russian oil exports, compelling Chinese independent refiners to reduce their refining output.
The rising trend in oil prices signals growing concerns about tightening supply and the potential for increased demand from alternative sources. Furthermore, the sanctions could lead Russia to adjust its pricing strategy, potentially pricing crude below $60 per barrel to remain competitive.
JP Morgan analysts highlighted that these new measures could provide the Trump administration with enhanced leverage in future negotiations with Russia regarding the timing and terms for lifting Biden’s sanctions.
Demand surges amid cold weather in the U.S. and Europe
Oil prices are expected to rise further due to anticipated increases in demand as a cold snap envelops key energy markets in the United States and Europe. The frigid temperatures have escalated heating needs, particularly in regions relying on natural gas and fuel oil for both residential and industrial heating.
The Energy Information Administration (EIA) reported a notable drawdown in distillate inventories last week, illustrating a surge in consumption amid the cold weather. Industry participants are keenly observing updates from major producers, including OPEC+, regarding potential supply adjustments to stabilize markets during this winter surge.
On Friday, oil prices saw another rise, recovering much of the losses experienced earlier in the week, driven by heightened expectations for increased demand for heating fuels. Traders are also monitoring for further signals of stimulus measures from China, especially following disappointing December inflation figures. Anticipation is building that Beijing will increase fiscal spending in 2025 to revitalize its economy, which has been grappling with a prolonged downturn.
As of 20:21 ET (01:21 GMT), Brent oil futures for March rose by 0.4 percent to $77.22 per barrel, while West Texas Intermediate (WTI) crude futures also saw a 0.4 percent increase, reaching $75.53 per barrel.
