Oil ETFs Surge on Russia Sanctions, But There’s Still Too Much Supply

Oil ETFs ripped higher Thursday after Washington unleashed its toughest sanctions yet on Russia’s oil industry, targeting the country’s two biggest producers in a move that could upend global crude flows.

The United States Oil Fund (USO) jumped 4.5% midday, while the United States Brent Oil Fund (BNO) gained 3.8%. WTI was last trading near $62 a barrel, while Brent fetched around $66, both still below where they began the year.

Harsh Sanctions

The new sanctions hit Rosneft and Lukoil, Russia’s two largest oil companies, aiming to choke off funding for Moscow’s war effort by constraining its ability to sell crude abroad.

The Treasury Department warned foreign banks they may face secondary sanctions if they help move Russian oil, but it remains to be seen whether India and China, Russia’s top buyers, keep purchasing or pull back.

India has hinted at trimming imports to avoid friction with Washington, while China hasn’t blinked. Meanwhile, Russia is expected to keep using its “shadow fleet” of tankers and middlemen to reroute barrels through third countries and other back-door channels that blur their origin.

Why Prices Remain Depressed

If traders thought these sanctions would meaningfully tighten supply, oil wouldn’t still be trading in the mid-$60s. The problem for oil bulls is that the market is awash in crude. Global inventories are near four-year highs and are expected to keep climbing.

According to the International Energy Agency, global oil demand is projected to rise by only 700,000 barrels per day this year and another 700,000 barrels per day in 2026, well below historical norms. Supply, on the other hand, is forecast to grow by 3 million barrels per day this year and 2.4 million next year, roughly split between OPEC and non-OPEC producers.

That large imbalance between supply and demand explains why prices remain relatively low. 

Geopolitics hasn’t been much of a factor lately, either. Russia’s output remains resilient despite sanctions and repeated Ukrainian strikes on its energy infrastructure. Those attacks have cut Russia’s crude-processing capacity by an estimated 500,000 barrels per day, leading to domestic fuel shortages but barely denting global balances.

Oversupply Still Rules

For now, the world remains comfortably supplied. OPEC members continue pumping aggressively and have enough spare capacity to fill gaps if Russian exports falter.

A meaningful price shift would likely require a far deeper hit to Russian output—on the order of millions of barrels per day—something the market clearly doesn’t believe is coming anytime soon.