Oil prices jumped on Thursday after the United States unveiled sanctions targeting Russia’s biggest oil companies, threatening supplies from one of the world’s top producing nations.
Brent crude rallied by more than 5% to trade near $66 a barrel, heading for its largest daily leap since the beginning of the Israel-Iran conflict on 13th June.
The US blacklisted Russian oil giants Rosneft PJSC and Lukoil PJSC, fuelling concern that key purchaser India will withdraw from dealings with Moscow.
Brent is currently rebounding from a five-month low reached on Monday. Futures had also risen on Wednesday amid signs the recent sell-off was overcooked and as US stockpiles shrank.
Rosneft, run by Russian President Vladimir Putin’s close ally Igor Sechin, and privately held Lukoil are the two largest Russian oil producers, together accounting for nearly half of the nation’s total exports, according to Bloomberg estimates.
The measure arrives at a time when global supply appears plentiful, as nations both inside and outside the OPEC producer alliance increase production amidst signs that demand growth is cooling.
If India does substantially reduce its orders—senior refinery executives have noted the restrictions would make it virtually impossible for the trade to continue—the crucial question will be whether China is willing to fill the gap.
However, while abundant supplies may cushion the blow of these sanctions, their effect should not be taken lightly. Re-organising India’s imports—of which more than a third currently come from Russia—would be a monumental undertaking.
The move is also sending ripples through China’s oil industry, which takes as much as 20% of its crude from Russia.
Admittedly, Russia has ample experience in evading sanctions, and their final impact remains unclear. The country’s seaborne crude shipments recently hit a 29-month high despite a raft of Western limitations.
Earlier this week, US President Donald Trump stated that India’s Prime Minister Narendra Modi had assured him the country would scale back its purchases.
Following the measures, Trump announced he planned to speak to Chinese President Xi Jinping about the nation’s Russian oil buying at a scheduled meeting next week in South Korea.
The European Union, meanwhile, heaped further pressure on the Kremlin, adopting a new package of sanctions targeting Russia’s energy infrastructure, including a complete transaction ban on Rosneft and Gazpromneft.
The oil market has been showing signs of surplus, with the amount on tankers at sea reaching a record high, and the International Energy Agency expecting world supply to outstrip demand by almost 4 million barrels a day next year.