Oil prices surged after the US announced sanctions on Russia's largest oil companies, threatening supplies from one of the world's largest oil producers.

West Texas Intermediate crude jumped 6.2% to trade above $61 per barrel, heading for its biggest one-day gain since the start of the Israel-Iran conflict on June 13.

The US blacklisted Russian oil giants Rosneft PJSC and Lukoil PJSC in an attempt to cut off revenues needed for Russia's war in Ukraine. Senior refinery executives in India—a major buyer of Russian crude—said the restrictions would make it impossible for oil flows to continue.

The latest US sanctions represent a radical policy shift, while previous efforts to pressure Russia to end the war included Group of Seven (G7) price caps on Russian oil aimed at limiting the Kremlin's revenues without disrupting supplies and causing a spike in global prices.

This move comes at a time when global supply appears abundant.

Countries inside and outside the OPEC+ producer alliance have been increasing production amid signs of slowing demand growth. If India does drastically cut purchases, the question is whether China, another major buyer of Russian crude, will be willing to fill the gap.

"The latest US sanctions against Russia's largest oil producer represent a significant and unprecedented escalation in Washington's pressure campaign against Moscow," said Rystad Energy's head of geopolitical analysis, Jorge Leon.

"Combined with the recent wave of attacks on Russian oil infrastructure, these sanctions raise the prospect of major disruptions to Russian crude oil production and exports, increasing the risk of forced production shutdowns."

Meanwhile, the European Union is exerting additional pressure on the Kremlin with a new package of sanctions targeting Russian energy infrastructure, including a complete ban on transactions with Rosneft and Gazprom Neft PJSC. European diesel and US gasoline prices have also surged.

The oil market has shown signs of surplus, with supplies on tankers at sea reaching record levels and the International Energy Agency predicting global supply will exceed demand by nearly 4 million barrels per day next year. This has recently caused the forward price curve to indicate increasing weakness.

However, while abundant supply may cushion the impact of these sanctions, it should not be underestimated. Restructuring India's imports—more than a third of which come from Russia—will be a monumental task. The move also sent shockwaves through China's oil industry, which imports as much as 20% of its crude oil from Russia. Russia has extensive experience in evading sanctions, and their ultimate impact is unclear.

The country's seaborne crude oil shipments recently reached a 29-month high despite a series of Western restrictions since the Ukrainian war began. Rosneft-backed Indian refiner Nayara Energy, for example, may remain an outlet for the country's oil barrels. But pressure on the country has increased significantly.

"India is under pressure to source its oil elsewhere, which will likely increase demand for non-Russian oil, reduce the oversupply in the oil market, and thus lead to higher oil prices," said Carsten Fritsch, a commodities analyst at Commerzbank AG. China could potentially buy more Russian oil, and "in that case, the impact of sanctions on the oil market would be less severe," he added.

The message from Indian refiners that they may no longer be able to buy Russian crude represents a significant change from recent signals that they would continue importing, albeit in reduced volumes. President Donald Trump said this week that Indian Prime Minister Narendra Modi assured him that the country would reduce its purchases.

Following those steps, Trump said he plans to speak with Chinese President Xi Jinping about the country's purchases of Russian oil at a meeting planned for next week in South Korea.

Rosneft, led by Putin's close ally Igor Sechin, and privately held Lukoil are Russia's two largest oil producers, together accounting for nearly half of the country's total exports, according to Bloomberg estimates. Taxes from the oil and gas industry account for about a quarter of the federal budget.

WTI for December delivery surged 5.7% to $61.85 a barrel as of 11:43 a.m. in New York. Brent for December jumped 5.4% to $65.95 a barrel. (alg)

Source: Bloomberg