Brent Consolidates Above $80/bbl
Brent crude futures maintained their strength above the $80/bbl handle this week, amid supply tightness fears following the Biden administration’s sweeping sanctions targeting the Russian oil industry. As of 13:00 GMT (time of writing), Mar’25 Brent traded around $81/bbl. In this review, we will discuss the following factors that affected crude oil prices this week:
- Sanctions Pressure from the US
- Bullish Physical Crude Oil Markets
- Israel-Hamas Ceasefire
The prospect of tougher sanctions on Russia and Iran continues to fuel bullish sentiment in the oil market. Amid supply tightness fears, money managers have quickly rebuilt long positions and liquidated short positions, with the long:short ratio in Brent at the highest level since May 2024. Also, net positioning has risen in seven of the last eight weeks. During his Senate confirmation hearing on Thursday, Scott Bessent, Trump’s nominee for Treasury secretary, said he would support stronger sanctions on Russia’s oil sector, including its majors. Notably, recent sanctions have avoided targeting state-owned Rosneft, which accounts for 40% of Russia’s crude exports. As Trump intends to facilitate a Russia-Ukraine diplomatic accord, easing sanctions could be used as a negotiating tool. However, pressure against Iran and Venezuela could be ramped up. Following recent developments, the outlook for crude has become less bearish, but uncertainties linger ahead of Trump’s inauguration and whether OPEC will respond.
Prompt physical differentials have strengthened significantly following the tighter sanctions on Russia. With less available oil cargos, freight costs have rallied, with the TD3C, the rate for a VLCC from the Middle East to China, rising by 50% w/w in the prompt. In line with this, Middle Eastern crude differentials surged as Chinese and Indian refiners sought alternative fuel supplies to substitute Russian medium sour crude. The increased competition for Middle Eastern crude oil has raised procurement costs for other Asian refiners, including those from Japan and South Korea. The Dubai crude physical premium (difference between the prompt physical Dubai price and M2 Dubai swap) rose significantly above $5/bbl on 17 Jan, up from just under $1/bbl a month ago. Intense buying of Dubai crude paper swaps has pressured the front-month Brent/Dubai below -$1/bbl as it nears all-time lows. Brent spreads rallied to a 15-month high; the steepening backwardation indicates expectations of a tight physical market, as both the Mar/Apr and Apr/May spreads are trading above $1/bbl. This has supported the Dated Brent market, and as Brent becomes increasingly discounted against Dubai, Atlantic Basin light sweet crude will be more attractive for Asian refiners and could further reinforce tightness and higher premiums in the North Sea.
Finally, the Israel-Hamas ceasefire was a significant development this week. Although this garnered no meaningful bearish reaction from the market, the upside to crude oil prices was likely capped. The Houthi rebels are expected to halt their Red Sea attacks if the ceasefire is properly implemented. This could result in the Suez Canal operating at full capacity again, leading to lower freight rates and helping offset the impact of Russian sanctions on shipping costs. However, the ceasefire remains highly fragile as Israeli strikes on Gaza continue and deep tensions persist, not only between Israel and the Axis of Resistance but also within Israel itself, where Netanyahu faces pressure from the far right. As such, the ceasefire could easily collapse, keeping the Middle East geopolitical risk premium a key driver of oil market dynamics.
