Oil prices surge after US sanctions and EU bans: A deep dive into last week’s market volatility
Last week, oil prices took a sharp jump, and it did not take long for everyone to question why. The answer lies in a mix of new US sanctions on Russia, together with an EU ban on Russian liquified natural gas (LNG) and growing concerns about the stability of the global oil market.
Why did the oil price spike like it did?
On Thursday, October 23, the oil price jumped by over 5%, making the largest single-day gain since June. This move came after the United States introduction of new sanctions on the two largest Russian oil producers Rosneft and Lukoil. The sanctions aim to cut off Russian oil producers from important international markets, putting a major dent in Russia’s ability to export oil and gas. The news raised fears about a potential supply shortage and sent the prices flying. In addition of the US sanctions, the EU also announced a ban on Russian liquefied natural gas (LNG), putting further pressure on the global energy market. Russia has played a major role in the global energy market and by taking a large part of their exports off the market has made oil even more expensive.
The sanctions ordered by US President Donald Trump and implemented by the Treasury are very straightforward. All US assets of Rosneft and Lukoil are frozen. US companies and individuals are also blocked from doing business with them. Additional sanctions may be placed on foreign financial institutions that work with the Russian oil giants, cutting off their access to international markets.
It all comes down to a stalemate in the recent negotiations with Putin to end the ongoing was in Ukraine. Trump announced last week that the talks did not “go anywhere”, and that Kremlin stuck to hard demands, including Ukraine giving up large chunks for territory. The new sanctions are meant to weaken Russia’s ability to fund the invasion by targeting its primary revenue source: taxes from the oil and gas industry, which makes up around a quarter of the total state budget.
Oil importers in India, which takes in between 1.6 and 1.8 million barrels of Russian crude oil per day, or more than a third of its oil shipments, are preparing for massive cuts of its oil shipments in order to comply with US sanctions. China’s state oil majors are also suspending their Russian oil purchases. China procured about 17% of its crude oil imports throughout August from Russia, and is Kremlins biggest customer, India coming in at second place.
The road ahead
Oil prices have been all over the place in recent times, and it is hard to say exactly where things will go from here. The combination of US sanctions, the EU LNG ban and continuous geopolitical tensions in Russia means the global oil market remains very uncertain. If these issues continue to disrupt the supply, we could potentially see more price hikes and volatility in the months ahead. Vontobel offers a wide range of leveraged products with oil as underlying. No matter which way you expect the price to move, you can gain long or short exposure through our offerings.
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