Oil prices have risen to a five-month high on concerns that the moves will tighten supply, with Brent trading above USD 80/bbl. (UBS)
Heating oil demand has increased because of cold weather in the US and Europe. Oil demand data was strong for the US for October (at 21.01mbpd, a record level for the month) and for India for December. Russian crude exports in December were lower, while concerns are growing about whether the Trump administration will target the availability of Iranian barrels. And finally, global oil inventories are falling and OPEC+ producers have demonstrated solid compliance levels to their quotas.
The US Treasury’s recent announcement about new sanctions on Russia’s oil industry is the latest catalyst, which has lifted Brent above the USD 80/bbl mark. The new sanctions target the third- and fourth-largest Russian oil producers (Gazpromneft and Surgutneftegas), which combined produce around 2mbpd and export about 0.9mbpd, according to Petro-Logistics. They also target 183 tankers (which in total transported around 1.5mbpd of crude oil and 0.2mbpd of refined products in 2024) and the Russian insurance companies (Ingosstrakh Insurance Company, Alfastrakhovanie Group) that provide insurance coverage for tankers transporting Russian energy. Moreover, the measures cover oil-trading houses as well oilfield service producers and energy officials. The timing of the new sanction is also interesting—it comes just ahead of the inauguration of Donald Trump as the next US president. We think it is unlikely that Donald Trump will repeal these sanctions as his first policy decision, opting instead to use them as leverage in potential peace negotiations between Russia and Ukraine.
Media reports indicate that Indian refiners have stopped dealing with tankers on the sanctions list. Tankers booked before 10 January are likely still to head to Indian ports, in line with a wind-down period as part of the new sanctions. We expect similar behavior from China’s small private (so-called “teapot”) refineries. Already, media reports claim that ports in Shandong province, where most teapot refineries are located, have been instructed to ban US-sanctioned tankers from entering. These Indian and Chinese refineries will likely source more oil from the Middle East, Africa, and the Americas in the near term, tightening the oil market.
As a result of these changes, front futures oil contract have outperformed longer-dated ones, resulting in a steeper downward-sloped futures curve (backwardation), a sign of market tightness. Considering comments by officials of the upcoming Trump administration regarding their desire to reintroduce a “maximum pressure campaign” on Iran, we see upside risks to oil prices in the short term. That said, while Russian crude exports could stay under pressure in the short term, the experience over the last three years suggests Russian oil exports could resemble a game of oil whack-a-mole, with new shadow fleet tankers emerging and transporting Russian barrels until those end up on a new sanctions list.
Main contributor: Giovanni Staunovo
Original report: New US sanctions on Russia lift oil prices, 13 January 2025.
