By Scott DiSavino

NEW YORK (Reuters) - Oil prices climbed about 2% to a four-month high on Monday on expectations that wider U.S. sanctions on Russian oil would force buyers in India and China to seek other suppliers.

Brent futures rose $1.25, or 1.6%, to settle at $81.01 a barrel, while U.S. West Texas Intermediate (WTI) crude rose $2.25, or 2.9%, to settle at $78.82.

That put Brent on track for its highest close since Aug. 26 and WTI on track for its highest close since Aug. 12, and kept both benchmarks in technically overbought territory for a second day in a row.

Moreover, with Brent and WTI front-month prices rising over 6% over the past three trading sessions, the premium of front-month contracts over later-dated futures, known in the energy industry as time spreads, soared to the highest in several months.

With interest in the energy market growing, total futures volume in Brent on the Intercontinental Exchange rose to its highest on Jan. 10 since hitting a record in March 2020. Open interest and total futures volumes for WTI on the New York Mercantile Exchange rose to their highest since March 2022.

Chinese and Indian refiners are seeking alternative fuel supplies as they adapt to new U.S. sanctions on Russian producers and tankers that are designed to curb the revenues of the world's second-largest oil exporter.

"There are genuine fears in the market about supply disruption. The worst-case scenario for Russian oil is looking like it could be the realistic scenario," PVM analyst Tamas Varga said. "But it’s unclear what will happen when Donald Trump takes office next Monday."

Goldman Sachs estimated that vessels targeted by the new sanctions transported 1.7 million barrels per day (bpd) of oil in 2024, or 25% of Russia's exports. The bank is increasingly expecting its projection for a Brent range of $70-$85 to skew to the upside.

"No one is going to touch those vessels on the sanctions list or take new positions," said Igho Sanomi, founder of oil and gas trading company Taleveras Petroleum.

At least 65 oil tankers have dropped anchor at multiple locations, including off the coasts of China and Russia, since the United States announced the new sanctions package.

Many of the tankers named have been used to ship oil to India and China after previous Western sanctions, and a price cap imposed by the Group of Seven countries in 2022 shifted trade in Russian oil from Europe to Asia. Some of the ships have also moved oil from Iran, which is under sanctions as well.

Six European Union countries called on the European Commission to lower the price cap put on Russian oil by G7 countries, arguing it would reduce Moscow's revenue to continue the war while not causing a market shock.

FACTORS WEIGHING ON OIL PRICES

In a move that could reduce some of the supply risk premium built up in global oil markets, mediators gave Israel and Hamas a final draft of a deal to end the war in Gaza after a midnight "breakthrough" in talks attended by envoys of both Joe Biden and Donald Trump.

The dollar climbed to a 26-month high versus a basket of other currencies following data last week that showed U.S. job growth unexpectedly accelerated in December and the unemployment rate fell to 4.1%, which could lead to higher inflation.

That prompted traders to scale back bets on how many interest rate cuts the U.S. Federal Reserve would make this year. Markets were now no longer fully pricing in even one rate cut from the Fed in 2025, down from roughly two quarter-point cuts priced at the start of the year.

A stronger U.S. currency could reduce demand for energy by making dollar-priced commodities like oil more expensive for buyers using other currencies.

Higher interest rates, used to combat rising inflation, could also reduce demand for energy by boosting borrowing costs and slowing economic growth.

(Reporting by Scott DiSavino in New York, Anna Hirtenstein in London, Florence Tan in Singapore, Rahul Paswan in Bangalore and Paul Carsten in London; Editing by David Goodman, Will Dunham and Bill Berkrot)