Analysis: Can oil continue its rally? Demand concerns loom ahead

(Originally posted on : Invezz )

Oil prices have continued their merry run since the beginning of the new year on the back of increased concerns over supply disruptions.

Oil benchmarks have climbed more than $5 per barrel since the close of December 31.

The optimism has been supported by further sanctions on Russian crude oil exports and tankers carrying oil from the country.

Over the last couple of weeks, less oil has been made available to the market, especially to India and China. Both Asian countries have been the top buyers of Russian oil since 2022.

As crude has been less available from Russia, buyers have turned to the Middle Eastern markets over the last few weeks.

This has generated more demand for Middle Eastern grades, while tightening the spot market in the likes of Saudi Arabia, the United Arab Emirates and Iraq.

The question now remains, how far can oil prices climb?

David Morrison, senior market analyst at Trade Nation said:

While the immediate fundamentals are quite different now compared to the summer, it shouldn’t be a surprise to see some sort of pullback and consolidation. At the same time, markets can continue to run at overbought, or oversold, levels for much longer than often seems reasonable.

Disrupting supplies

According to Commerzbank AG, oil exports from the UAE and Russia were significantly reduced in December.

“In addition, the sanctions were apparently implemented more strictly,” Barbara Lambrecht, commodity analyst at Commerzbank, said.

Experts believe that the western sanctions against the Russian shadow fleet are having an effect.

Russia has been largely successful in evading western sanctions since 2022 by using a shadow fleet of old ships to carry its oil to other countries.

According to data from Bloomberg, Russia’s seaborne crude oil exports fell to just under 2.9 million barrels per day in the week ending January 5.

“With that, the less volatile 4-week average also fell to just over 2.9 million barrels per day,” Carsten Fritsch, analyst at Commerzbank, said in a report.

This is the lowest level since August 2023. In October 2024, the figure was as much as 540 thousand barrels per day higher, according to Fritsch.

Trade route

The disruptions in exports largely took place in the Baltic Sea ports of Russia.

Exports through the Black Sea and Pacific ports remained more or less steady apart from the usual weather-related fluctuations.

“The transport route via the Baltic Sea is associated with higher risks for the Russian shadow fleet, as the tankers are easier to inspect here,” Fritsch added.

The crude oil could therefore also have been diverted to the ports on the Black Sea or the Pacific to be loaded there.

However, more crude oil is being processed in Russia, but less is reaching the market. This causes a shortage in supplies in countries such as India and China.

According to reports, India’s state refineries are said to be missing 10-15 cargoes of crude oil from Russia that were due to be loaded in January.

India’s imports of Russian oil in December plunged to a 17-month low to nearly 1.40 million barrels per day, Vortexa’s senior market analyst, Emma Li, told Invezz.

“As a result, India is having to look for alternative suppliers, primarily in the Middle East, which is creating additional demand and leading to a market tightening,” Fritsch said.

Focus on demand

The disruptions in supply have caused oil prices to trade near levels not seen since October 2024.

“Asian buyers have already been looking for alternative grades from the Middle East, with broader sanctions against Russia and Iran making this oil flow more difficult. This move had pushed the Brent-Dubai spread into negative territory in recent weeks, although it has since reverted to a premium,” analysts at ING Group, said in a note.

However, experts also believe that the focus will shift quickly back to the demand side as early as next week.

Major energy agencies such as the International Energy Agency, the Organization of the Petroleum Exporting Countries and the US Energy Information Administration will release their monthly report next week.

“The rapid advance of electromobility in China, combined with more moderate economic growth in the future, is likely to permanently dampen demand for oil in China, which used to be the most important driver of demand,” Commerzbank’s Lambrecht said.

According to the German bank, the likes of EIA and IEA are both likely to scale down their demand growth forecasts for oil this year in their latest reports.

Lambrecht further said:

The IEA’s forecasts are also unlikely to provide much of a boost, although we do not expect any major adjustments here due to the already somewhat pessimistic assessment of oil demand growth. OPEC could lower its demand forecast once again, bringing it closer to the IEA.

Against such a gloomy demand scenario, it would be difficult for oil to keep rising. The market is likely to see some corrections next week.

At the time of writing, the West Texas Intermediate crude oil was at $76.23 per barrel, up 3.1%, while Brent crude was 3.2% higher at $79.37 a barrel.

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