January Oil Prices Rise on Global Supply Concerns

Rally Influenced by Sanction Prospects and Geopolitical Tensions

On Friday, January WTI crude oil (CLF25) closed up +1.27 (+1.81%), while January RBOB gasoline (RBF25) rose by +0.0133 (+0.67%). Crude oil and gasoline prices surged to their highest points in two and a half weeks, primarily driven by the potential for new sanctions on crude supplies from Russia and Iran.

As tensions escalated following Russia’s intensified air strikes on Ukraine’s infrastructure, oil prices received upward momentum. However, a rally in the dollar index (DXY00) limited the gains seen in crude prices.

The market looks closely at discussions about sanctions on Iranian and Russian crude exports, which could tighten global oil supplies and elevate prices. Mike Walz, a key advisor to President-elect Trump, has promised a return to “maximum pressure” tactics against Iran. Meanwhile, the Biden administration is also contemplating new, stricter sanctions targeting Russian crude oil.

Support for crude prices was noted after a report from the Times of Israel suggested that Israel’s military views the potential change in Syria’s regime as an opportunity for action against Iran, potentially complicating the overall conflict in the Middle East and threatening crude supplies from the region.

Despite these factors, the Bundesbank’s recent revision of Germany’s 2024 GDP forecast to -0.2% from +0.3% indicates a weakening demand for energy, which could pose a downward risk for crude prices.

Additionally, Thursday’s report from the International Energy Agency (IEA) was not favorable for prices. The IEA indicated that the global oil market could be oversupplied by 1.4 million barrels per day (bpd) if OPEC+ executes its plans to increase production starting in April. Even without these increases, a supply surplus of 950,000 bpd is expected.

On the other hand, potential new stimulus measures in China promise some support for oil prices. The Chinese Politburo, led by President Xi Jinping, announced plans for a “moderately loose” monetary policy in 2024 alongside a commitment to more proactive fiscal measures.

Vortexa reported a 12% decline in crude oil held on tankers worldwide, which could lead to higher oil prices. As of December 6, stationary tankers held 62.74 million barrels of crude oil.

Crude prices also found support after OPEC+ delayed a planned increase in their oil production target by +180,000 bpd from January to April. The United Arab Emirates has also postponed its planned 300,000 bpd production raise to April, marking a shift from a previously scheduled restoration of 2.2 million bpd in monthly increments until late 2025. This increase has now been extended to September 2026, while OPEC’s total crude production rose by +120,000 bpd to 27.02 million bpd in November.

Geopolitical tensions, notably the ongoing conflict between Ukraine and Russia, continue to lend support to crude prices. Recently, Russia has launched hypersonic missiles into Dnipro and President Putin warned of possible strikes on decision-making centers in Kyiv. He has also embraced a new nuclear doctrine expanding the circumstances under which Russia might utilize nuclear weapons.

However, declining crude demand in China presents a bearish outlook for prices. Data from Bloomberg revealed China’s apparent oil demand dropped by 5.4% year-over-year in October, averaging 14.07 million bpd. Similarly, from January to October, apparent oil demand fell by 4.03% year-over-year to 14.00 million bpd.

Moreover, an uptick in Russian crude exports, which rose by 570,000 bpd to 3.36 million bpd in the week ending December 1, is another bearish factor affecting the market.

The EIA’s report on Wednesday highlighted that US crude oil inventories were 6.2% below the seasonal five-year average, while gasoline inventories were down by 3.6%. Distillate inventories also fell by 4.5% below the five-year seasonal average. In the week ending December 6, US crude oil production climbed by 0.9% to a record high of 13.631 million bpd.

According to Baker Hughes, the number of active US oil rigs remained unchanged at 482 in the week ending December 13, slightly above last month’s low of 477 rigs. Over the past two years, the count has decreased from a high of 627 rigs in December 2022.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are solely for informational purposes. For more information, please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.