Oil heads for weekly gain on supply fears due to US sanctions on Russian companies

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HOUSTON (Reuters) -Oil prices edged up on Friday, extending the previous day’s surge and on track for a weekly gain as U.S. sanctions on Russia’s two biggest oil companies over the war in Ukraine spurred supply concerns.

Brent crude futures rose 50 cents, or 0.76%, to $66.49 by 11:33 a.m. CDT (1633 GMT). U.S. West Texas Intermediate crude futures also advanced 30 cents, or 0.49%, to $62.09.

“It’s the sanctions,” said Phil Flynn, senior analyst for Price Futures Group, adding that it appeared there would not be a resolution soon.

Futures have been driven down in recent weeks on expectations of a glut in oil supplies as OPEC and its allies boosted supply.

“Looking at the demand numbers from the U.S. Energy Information Administration on Wednesday, we didn’t see any evidence of a glut,” Flynn said.

Both benchmarks jumped more than 5% on Thursday following the sanctions announcement and were set for about a 7% weekly gain, the biggest since mid-June.

Six-month spreads for Brent and U.S. crude futures returned to backwardation – a market structure in which contracts for later loading are priced below those for earlier loading – having briefly this week been in contango, in which later loading is more expensive.

That indicates a shift among trader concerns from oversupply to undersupply, letting traders sell at higher near-month prices instead of paying to store oil for future sale.

US SANCTIONS TWO MAJOR RUSSIAN OIL SUPPLIERS

U.S. President Donald Trump hit Russia’s Rosneft and Lukoil with sanctions on Thursday to pressure Russian President Vladimir Putin to end the Ukraine war. The two companies together account for more than 5% of global oil output.

The sanctions prompted Chinese state oil majors to suspend Russian oil purchases in the short term, trade sources told Reuters. Refiners in India, the largest buyer of seaborne Russian oil, are set to sharply cut Russian crude imports, industry sources said.

“Flows to India are at risk in particular,” Janiv Shah, a vice president of oil markets analysis at Rystad Energy, said in a client note. “Challenges to Chinese refiners would be more muted, considering the diversification of crude sources and stock availability.”

Kuwait’s oil minister said the Organization of the Petroleum Exporting Countries would be ready to offset any shortage in the market by raising production.

The U.S. said it was prepared to take further action, while Putin derided the sanctions as an unfriendly act, saying they would not significantly affect the Russian economy and talking up Russia’s importance to the global market.

Britain put sanctions on Rosneft and Lukoil last week and the European Union approved a 19th package of sanctions against Russia that includes a ban on imports of Russian liquefied natural gas.

The EU also added two Chinese refiners with a combined capacity of 600,000 barrels per day, as well as Chinaoil Hong Kong, a trading arm of PetroChina, to its Russian sanctions list, its official journal showed on Thursday.

Russia was the world’s second-biggest crude oil producer in 2024 after the United States, U.S. energy data showed.

Investors are also focusing on a meeting between Trump and Chinese President Xi Jinping next week as the pair work to defuse longstanding trade tensions and end a spate of tit-for-tat retaliatory measures.

(Reporting by Erwin Seba in Houston, Anna Hirtenstein in LondonAdditional reporting by Mohi Narayan in New Delhi and Yuka Obayashi in TokyoEditing by Peter Graff)