Oil Prices Rise Amid Concerns Over Russia and Falling U.S. Inventories

Oil prices continued to climb as worries about potential disruptions in global supply chains associated with Russia have intensified. On Wednesday, Brent crude surpassed $82 a barrel following a 2.6% increase, marking its highest point since July.

The rise in oil prices can be attributed to several factors, including a decline in U.S. commercial crude inventories, which have now decreased for eight consecutive weeks, reaching their lowest levels since April 2022. With U.S. sanctions imposed on Russia's energy sector last week, the market has become increasingly jittery, particularly following warnings from the International Energy Agency (IEA). The IEA has indicated that these sanctions could significantly disrupt Russia's oil supply and distribution networks.

Changing Dynamics in the Oil Market

As a result of these developments, traditional purchasers of Russian crude are seeking alternative supplies. The situation has led to a notable rise in the amount of oil stranded off the coast of China, as traders, refiners, and shippers navigate the complex regulations stemming from the sanctions. In India, state refiners are moving quickly to settle existing contracts for Russian oil to avoid potential disruptions.

Broader Market Implications

Brent crude has experienced a robust 10% increase since the beginning of the year. Factors contributing to this growth include colder weather boosting demand, the ongoing decrease in U.S. inventories, and a multitude of risks tied to transport disruptions. Market participants are also increasingly wary that the incoming Trump administration may impose stricter sanctions on Iran and introduce trade barriers that could further affect oil flows.

In a recent IEA report, it was disclosed that the 160 tankers newly sanctioned by the U.S. last week were responsible for transporting over 1.6 million barrels of Russian oil per day in 2024, accounting for around 22% of the nation's maritime oil exports. The IEA's analysis noted that prior sanctions had proven highly effective, reducing designated tanker activity by as much as 90%.

The falling inventories in the U.S. highlight a tightening physical market, with the WTI prompt spread—representing the difference between its two nearest contracts—widening to $1.34 a barrel. This backwardation pattern suggests a bullish outlook, especially when compared to 42 cents a month prior. Notably, the recent spike in crude prices occurred concurrently with a ceasefire agreement between Israel and Hamas. This truce, which will take effect this Sunday for a duration of six weeks, marks a significant development in the context of the ongoing conflict that had lasted for 15 months.

oil, Russia, IEA