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Crude oil rally amid strong winter demand and Russian sanctions
Commodities 5 minutes to read
Ole Hansen
Head of Commodity Strategy
Key points
- Crude prices have recorded strong gains so far this January, supported by winter demand and short-term risks to supply from Russia amid fresh sanctions
- Rising roll yields providing a significant tailwind for bullish positions while discouraging shorting the oil market at this stage
- Fresh US sanctions on Russia impacting tankers that transported more then 1.5 million barrels per day last year
While the latest sanctions are mostly priced in, the current momentum may still push prices higher towards USD 85, which we highlight as a potential peak in our soon-to-be-published Q1-2025 outlook
WTI and Brent crude oil prices have recorded strong gains so far this January, both trading up by more than 8% following a final quarter of 2024 that saw most activity concentrated near the lower end of ranges prevailing for the past two years. While the 2025 outlook suggests a well-supplied market—driven by non-OPEC+ production growth of around 1.4 million barrels per day, outpacing global demand growth, which the IEA estimates at around 1.1 million barrels per day—the short-term outlook has turned increasingly supportive. This shift is due to a combination of strong winter-related demand for diesel and heating oil and, not least, the latest rounds of US sanctions on Russia’s oil industry, which went much further than expected.
An exceptionally cold January across parts of the US has lifted demand, not only for natural gas, which has surged to a two-year high above USD 4 per MMBtu, but also for diesel and heating fuels. Combined with lower US crude stocks, these developments have already driven up prices ahead of the latest sanctions announcements. US crude inventories at Cushing, the delivery hub for WTI futures, have dropped to an 11-year low, nearing the minimum operating level of 20 million barrels. This inventory drop has strengthened the backwardation structure, where prices for prompt delivery rise faster than those for future delivery.
This development has attracted investor demand due to the positive carry achieved when rolling from an expiring contract to a lower-priced one. At unchanged prices over three months, an investor holding and rolling WTI futures could potentially achieve an annualised return of almost 15%, providing a significant tailwind for bullish positions while discouraging shorting the oil market at this stage.
The incoming Trump government is expected to tighten sanctions on Iran, potentially forcing a reduction in the nation’s output, which over the past four years has increased by around 1.3 million barrels per day to a six-year high. From a short-term perspective, the more significant factor is the US Treasury’s announcement on Friday of additional Russian sanctions targeting more than 180 tankers carrying Russian crude, as well as maritime insurance providers based in Russia. These tankers transported more than 1.5 million barrels per day of crude last year, primarily to buyers in China and India.
Despite almost three years of sanctions, Russia has managed to redirect its oil flows, maintaining production and exports. However, the extent of these latest sanctions will take time for the market to absorb. Combined with increased winter demand, the short-term outlook points to price support. However, with prices already up by around USD 10 per barrel, further gains depend on the market’s ability to sustain momentum, thereby supporting recently established long positions held by speculators.
In the week to 7 January, before the latest surge above USD 80 per barrel, speculators increased their net long positions in Brent crude futures by 21% to 227 million barrels, an eight-month high, while the gasoil (diesel) long rose 42% to a six-month high. Note that delayed COT reports covering US-traded futures markets will be released today after the US market close at 20:30 GMT.
Last week, WTI broke solidly higher, first surpassing the 200-day moving average and then the trendline from the September 2023 high, before encountering resistance today around USD 78.50—the October high. While the latest Russia sanctions news is nearly priced in, current momentum may still push prices higher, potentially reaching USD 85, which we in our soon to be published Q1-2025 outlook view as a potential peak.
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