Oil Bulls Betting New Sanctions Will Affect Oil Supplies

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading higher on Wednesday after a mixed opening as speculators bet an escalation of the military conflict between Ukraine and Russia will lead to a disruption in oil supplies. Nonetheless, gains could be limited as the U.S. and Iran move closer to a nuclear agreement that should open the door for more oil to hit the market.

At 15:13 GMT, April WTI Crude oil is trading $93.49, up $1.58 or +1.72% and April Brent crude oil is at $98.22, up $1.38 or +1.43%. The United States Oil Fund ETF (USO) is trading $66.96, up $1.42 or +2.17%.

Traders Preparing for More Sanctions Against Russia

While the first round of sanction imposed on Russia by the United States, the European Union, Britain, Australia, Canada and Japan were focused on Russian banks and elites, the next round could target oil and gas flows. This is likely to happen if Russia launches a full invasion of Ukraine.

Actions the Biden administration took on Tuesday and may take soon to punish Russia’s economy over its aggression in Ukraine are not intended to hit global energy markets, a senior U.S. State Department official said.

Western nations on Tuesday imposed new sanctions on Russian banks and elites after Moscow ordered troops into separatist regions of eastern Ukraine.

“The sanctions that are being imposed today, as well that could be imposed in the near future, are not targeting and will not target oil and gas flows,” said the official, who spoke to reporters on the condition of anonymity. “We would like the market to take note that there’s no need for increasing the price at the moment.”

However, despite efforts by the Biden administration to keep oil markets calm, crude prices edged close to $100 a barrel after Moscow ordered troops into two breakaway regions in eastern Ukraine.

Government officials are saying that nothing is happening on the ground in Ukraine now, nor in coming days that could affect the flow of oil to global markets, but Wednesday’s price action suggests traders think otherwise.

Speculators are betting that an escalation of the invasion will lead to further sanctions and an eventual disruption of supplies. Meanwhile, the U.S. is working with oil producing nations from the Organization of the Petroleum Exporting Countries (OPEC) and with large oil consuming countries to respond if needed to calm energy markets.

Short-Term Outlook

We don’t like to chase headlines, but if the Russian invasion of Ukraine intensifies then look for the U.S. and other Western nations to step up their sanctions against Russia. I don’t see how they can continue to dance around sanctions that will eventually affect oil supplies.

The U.S. is likely to respond to a sharp rise in oil prices by reaching a hastily agreed upon U.S. – Iran nuclear deal and releasing more oil from the Strategic Reserve.