Early-Year Strength In Oil Markets Likely To Continue

By Alex Kimani – Jan 15, 2025, 5:00 PM CST

Brent crude topped $82 while WTI crude topped $80 today.
Standard Chartered: strength in oil markets is likely to persist.
Standard Chartered: the continuation of OPEC+ output cuts tightened the market in early in 2025.

The oil price rally that kicked off last week after the Biden administration announced the harshest sanctions yet on Russian oil has carried over into the new week. Brent crude for March delivery rose to above $82 per barrel this afternoon, while WTI crude for February delivery gained topped $80 per barrel. The rise took front-month Brent above the key 200-day moving average (currently $ 78.98/bbl for the continuous front-month contract) for the first time since July.

Last week, Reuters reported that a purported U.S. Treasury document circulating among traders in Europe and Asia, revealed that some 180 vessels, several senior Russian oil executives, dozens of traders and two major oil companies are targeted by the sanctions. Later, it emerged that the Biden administration had targeted Surgutneftgas and Gazprom Neft, two firms that handle 25% of Russian oil exports. The two companies shipped an average of 970,000 bbls per day in 2024.

Commodity experts at Standard Chartered predict that the ongoing strength in oil markets at the start of the new year is likely to persist, powered by, among other things, the removal of more Russian barrels from the market following the sanctions. According to StanChart, the new restrictions roughly triple the number of directly sanctioned Russian crude oil tankers, enough to affect around 900 thousand barrels per day (kb/d). Whereas it’s highly likely that Russia will try to circumvent the sanctions by employing even more shadow fleet tankers and ship-to-ship transfers, StanChart sees 500kb/d of displacements over the next six months.

Other than the sanctions, StanChart says there are other deeper reasons for the strength in prompt markets: OPEC+ has largely stuck to its target quotas; non-weather-related demand is more robust than consensus expected; and non-OPEC supply growth is coming in lower-than-expected. In short, StanChart says the market strength is likely to persist after weather patterns return to seasonal averages. Last month, commodity analysts at Standard Chartered argued that the latest decision by OPEC+ to delay the planned output increase by three months to April 2025, and extend the full unwind of production cuts by a year until the end of 2026 will ensure that oil markets are not oversupplied in 2025. According to StanChart, by both delaying the start of voluntary cut unwinds and flattening the slope of the m/m increases, the organization has effectively removed a large amount of oil from the 2025 plan. The analysts point out that the previous plan for voluntary cut unwinds and the UAE target increase would have added a cumulative 496.3 mb to the market in 2025; however, the new schedules will now add just 191.3 mb, good for a 836 thousand barrels per day (kb/d) cut for the whole year. Further, StanChart’s supply-demand model implies that output can increase under the new schedules without causing a global inventory build, even without consideration of compensation. StanChart has forecast a 2025 global demand increase of 1.31 mb/d, with non-OPEC supply growth clocking in at 0.96 mb/d. StanChart’s model puts the Q1 balance as a draw of 0.2 mb/d, the same result as in the current EIA projections. StanChart has projected an overall draw of 0.1 mb/d for the entire 2025, even if there are no reductions in export flows from Iran during the year. StanChart says the market has not priced in the full extent of how much oil has been removed from the plan.

That said, the sanctions are not expected to have a big effect on gas markets. The latest round of U.S. sanctions on Russia have also affected gas, with two LNG terminals sanctioned, including Portovaya, a small terminal in the Baltic Sea. However, the main Baltic terminal (Yamal LNG) with more than 10 times the capacity of Portovaya was not included in the restrictions. According to StanChart, the EU imported 183 million cubic metres per day (mcm/d) of Russian gas in December, ~22% of net gas imports and well down from pre-invasion-of-Ukraine averages (in 2021 the flow averaged 475 mcm/d). Of the December total, StanChart has reported that 46 mcm/d flowed through Ukraine, a flow that ceased on 1 January, while the remaining 137 mcm/d just over half was Russian LNG. Interestingly, flows of Russian LNG into the EU averaged a record-high 69 mcm/d in December, well above the pre-war 2020-21 average of 39 mcm/d.

By Alex Kimani for Oilprice.com

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