Brent crude futures have surged above the $80/bbl handle, reaching a 4-month high. Supply tightness concerns fuelled the rally as the outgoing Biden administration imposed a severe sanctions package on the Russian oil industry. This week, we expect price action to consolidate around the $80/bbl region as the market evaluates the impact of the following factors:
- Sanctions on Russia ahead of Trump’s inauguration.
- Overbought Technical Indicators.
- Macroeconomic Headwinds and Upcoming Economic Data.
Intensified US sanctions targeting Russian oil exports have generated renewed bullish sentiment in the market, and expectations of greater crude scarcity strengthened both flat price and the backwardation in Brent spreads. This will likely spur Chinese and Indian refiners to source crude from other Middle Eastern sources. Shandong Port Group recently announced a ban on US-sanctioned ships to avoid legal risks, thus affecting crude imports from teapots. Meanwhile, India has stated that it will not take crude from sanctioned ships booked after 10 Jan. As a result, the Feb’25 Brent/Dubai differential gapped lower down to -$0.60/bbl on Monday morning, an 8-month low for the M1 contract, reinforcing the prompt tightness in the Dubai crude market. The last-minute move has created complications for President-elect Trump, given his campaign promise of ending the war between Russia and Ukraine. There are also questions about whether the Trump administration will toughen sanctions against Iran and Venezuela. JP Morgan estimates that the newly-sanctioned vessel would equate to 1.4 mb/d of crude exports. While there are clear downside risks to Russian crude exports, it does not necessarily follow that OPEC+ members with spare capacity will officially announce their intent to fill the gap. However, it does not preclude more cheating on quotas by those who can.
As Brent rallies to 4-month highs, technical indicators have been pushed into overbought territory. Brent has breached the upper Bollinger band, while the 14-day RSI is now overbought, at 75 as of 13 Jan. Price action has encountered resistance at the low $80 handle, and we expect consolidation and pullback at these levels as in-the-money traders take profit. The latest ICE CFTC COT data shows money managers accelerating their purchases of Brent futures length in the week ending 07 Jan, as the long:short ratio and net positioning rose to 9-month highs. However, the long:short ratio still sits below the long-term median (47th percentile for all weeks since 2013), suggesting that further bullish positions can enter. Similarly, while CTA net positioning in Brent flipped positive for the first time since October, they remain considerably below the highs reached in April.
At higher outright crude prices, macroeconomic headwinds should increasingly weigh on sentiment and limit gains in the near term. Last Friday’s blowout US non-farm payroll data showed an addition of 256k jobs in December 2024, beating expectations, and was the most since March. With inflationary pressures revived, the Fed will not be pressured to cut rates anytime soon. In response, the dollar index and 10-year Treasury yield reached their highest level since November 2022 and November 2023, respectively. Pivotal economic indicators this week include US CPI data, which will offer clues on the direction of inflation. Meanwhile, China’s Q4 GDP, along with data on retail sales, home prices, and industrial production, will provide insights into the impact of recent stimulus measures. The economic data from the world’s two largest economies could also shape sentiment in oil prices.
