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Increase in Oil Prices Due to Strong Winter Demand and Sanctions Imposed on Russia

ENERGYIncrease in Oil Prices Due to Strong Winter Demand and Sanctions Imposed on Russia

Crude oil prices experienced strong gains in January, driven by winter demand and short-term risks related to Russian supply in the face of new sanctions. Increasing profits from rolling contracts are fueling long positions. The latest US sanctions on Russia target tankers that carried more than 1.5 million barrels per day last year. While the new sanctions are largely priced in, the ongoing upward momentum may still push prices toward $85 per barrel.

WTI and Brent crude prices saw substantial increases in January, rising by over 8%, following the last quarter of 2024, which saw most activity focused on the lower end of the price range from the past two years. While forecasts for 2025 point to a well-supplied market—driven by a 1.4 million barrel per day increase in production outside of OPEC+ and a global demand growth of around 1.1 million barrels per day according to the IEA—short-term forecasts have become more favorable. This shift is attributed to a combination of strong winter demand for diesel and heating oil, as well as the latest round of US sanctions against the Russian oil industry, which turned out to be more stringent than anticipated.

An exceptionally cold January in parts of the United States increased demand not only for natural gas, which surged to its highest level in two years, exceeding $4 per MMBtu, but also for diesel and heating fuels. Combined with lower oil inventories in the US, these changes have already led to price increases even before the announcement of the latest sanctions. Oil stockpiles at Cushing, the main delivery point for WTI futures, fell to the lowest level in 11 years, approaching the minimum operational level of 20 million barrels. This decline in stocks has caused immediate delivery prices to rise faster than future delivery prices (backwardation).

This phenomenon has attracted investor demand due to the positive carry trade that can be made by rolling positions from an expiring contract to a cheaper one. With prices unchanged for three months, an investor holding and rolling WTI futures contracts could potentially achieve an annual return of nearly 15%, providing a strong boost for bullish positions and discouraging the opening of short positions in the oil market at this stage.

The stock levels at Cushing, the delivery hub for WTI, support rising immediate futures prices compared to future delivery prices.

The new Trump administration is likely to tighten sanctions on Iran, which could force the country to curb its oil production, which has increased by about 1.3 million barrels per day over the past four years, reaching its highest level in six years. From a short-term perspective, a more significant factor is the US Treasury Department’s Friday announcement of additional sanctions on Russia. These sanctions target more than 180 tankers transporting Russian oil and Russian maritime insurance companies based in Russia. Last year, these tankers transported over 1.5 million barrels of oil per day, primarily for buyers in China and India.

Despite nearly three years of sanctions, Russia has managed to reroute its oil exports, maintaining production and export levels at a stable pace. However, the market needs time to fully absorb the impact of the latest sanctions. Combined with rising winter demand, short-term forecasts suggest support for prices. However, with prices already up by around $10 per barrel, further increases will depend on the market’s ability to maintain momentum, which could support recently opened long speculative positions.

In the week leading up to January 7, ahead of the recent price rise above $80 per barrel, speculators increased their net long positions in Brent oil futures by 21%, to 227 million barrels, the highest level in eight months. At the same time, long positions in diesel futures rose by 42%, reaching a six-month high.

Last week, the WTI price rose significantly, first breaking above the 200-day moving average, then crossing the trendline established from the September 2023 peak. On the last Monday, it encountered resistance near $78.50, the October high. While the latest news about sanctions on Russia is almost fully priced in, the current momentum may still drive prices higher, potentially reaching $85.

Ole Hansen, Commodity Market Strategy Director, Saxo

Source: https://managerplus.pl/wzrost-cen-ropy-naftowej-w-zwiazku-z-silnym-popytem-zimowym-i-sankcjami-nalozonymi-na-rosje-49954

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