Crude oil prices extend rally on prospect of fresh Russia sanctions

Oil futures rose on Tuesday as the United States and Europe planned new sanctions to punish Moscow over alleged war crimes by Russian troops in Ukraine, raising concerns of tighter global supply, while Iran nuclear talks stalled.

Brent crude futures rose $1.87, or 1.7%, to $109.40 a barrel, while U.S. West Texas Intermediate futures were up $1.83, or 1.8%, at $105.11 a barrel at 0615 GMT.

Both contracts briefly jumped more than $2 a barrel in early Asian trade after Japanese industry minister Koichi Hagiuda said the International Energy Agency (IEA) was still working out details for a planned second round of a coordinated oil releases.

Global crude futures had settled up more than 3% on Monday on the threat of more sanctions on Russia over civilian killings in Ukraine and following a pause in Vienna in talks to revive the Iran nuclear deal. A deal could put more Iranian barrels into the market. Iran blamed the United States for halting the talks.

There were mounting expectations that Europe would finally take action to reduce transactions with Russia's energy sector, further squeezing supplies, OANDA senior analyst Jeffrey Halley said in a note.

Tina Teng, a markets analyst at CMC Markets APAC & Canada, expects oil prices to be underpinned by geopolitical tensions in the coming days despite efforts by U.S. and allies to increase supplies.

"In the long run, oil prices may continue the upside momentum due to supply shortfalls and hedging demands to counter high inflation," she said.

Consultancy Wood Mackenzie on Monday estimated EU members and advanced economies including Japan and South Korea could "swap" some 650,000 barrels per day of Russian crude oil with similar grades and volumes. These would primarily come from Middle East volumes that are normally purchased by China and India.

The move is likely to boost Middle East oil demand with top exporter Saudi Arabia setting record prices for May supplies to Asia.

"Global crude oil trade will rebalance by 'crude swapping' between 'self-sanctioning' advanced economies and developing markets," said Alex Sun, a managing consultant for Wood Mackenzie, noting that a steep discount for Russian Urals barrels has created a buying opportunity for China to fill declining strategic reserves.

India's state run Mangalore Refinery and Petrochemicals Ltd. purchased 1 million barrels of Russian Urals for May loading, in a rare move driven by the steep discount offered.

(Reporting by Liz Hampton in Denver and Isabel Kua in Singapore; Editing by Richard Pullin and Edmund Klamann)