It does feel something of an oddity after last year as oil becomes the flavour for investors and stock markets lose their sheen. Weather aside, which is touched upon below, sanctions continue to fund the move higher in oil prices while similar thoughts of tariffs dog the progress of global bourses. However, it is foolhardy to embark on an entrenched view that this will continue. The inauguration of Donald Trump on Monday is easily viewed as an opportunity for markets to pursue some sort of consistency in message, but the current activity of both the outgoing and incoming administrations will keep investors' teeth on edge. Take the mixed messages coming from Washington overnight. The US and allies are set to extend restrictions on semi-conductor exports and this alone ought to have tech heavy names suffering a bout of selling and in terms of national pressure, China's indices should wilt. But the Trump economic team has leaked that increases in tariffs could be gradually implemented rather than one fell swoop of 60% on China so vociferously aired in the election campaign. The world abounds with political proclivity to say one thing and do another, markets should not expect Trump II to be any different. 

As for our market, the spell of increased and much more targeted sanctions keeps oil participants mesmerised. Besides the obvious need for Russian and probably Iranian crude buyers to seek alternative supply, the amount of named ships from the so-called shadow fleet means that boat availability is also becoming tighter. When freight rates hike it normally curtails would-be end users and traders due to the increased costs. But in this circumstance, the increase in shipping economics serves to highlight tightness and while China for one is normally complacent when confronted with sanctions, the reports across wires that Shandong and other refining areas are leaving 'dark' ships off their coast because of the legality in landing their cargoes leads to the idea that China and probably India will now be looking for feedstock transported by acceptable international means. It is a confusing situation and one that will not find solution very soon. Adding to the ponderable mess is the news of ceasefire in Gaza. Yes, that old chestnut. But according to Reuters, mediators that included representatives of both the Biden administration and the new Trump one report on a breakthrough and is the reason for this morning's lower opening.

Oil prices are not up on sanctions alone

Seasonality is indeed upon us, and although the plaudits for much of the rally in oil prices are due to the confusing situation surrounding the new sanctions implemented on Russia by the outgoing Biden administration, one of the roots of initial rally was largely down to the upward progress of gas prices. Winter storms have scythed through North America into the New Year, and although it appears that the current weather situation has calmed, temperatures remain cold. These reduced temperatures are likely to persist in the back half of January as the US National Oceanic and Atmospheric Administration (NOAA) recently forecasted that an extensive frigid cold air mass reservoir will develop over the North Pacific and Alaska and spread into Canada and much of the United States. The cyclonic circulation across the north polar stratosphere, famously named the Polar Vortex, is in full swing and its effects have been seen in all countries of the Northern Hemisphere that border the arctic circle and then in turn spill cold air into their neighbours.

It will be interesting to see how the EIA assesses the US Natural Gas market in its Short-Term Energy Outlook (STEO) today. In December’s report, the EIA assumed milder weather than normal in the first quarter of 2025 with gas inventories only seeing small draw downs and therefore maintaining a 2% higher level than the five-year 2020-2024 period. However, since that report dated December 10, Henry Hub Natural Gas Futures have rallied a full $1/MMBtu from 3.172 to 4.181 at time of press and much higher than the EIA’s forecast that prices will be stuck in and around the $3/MMBtu mark for 2025. Fleeting as the current weather situation might be, the political anxiety around gas prices is likely to emulate those seen in Crude prices and because of ‘sanction creep’, customers of Russian Gas might feel obliged to look elsewhere for supply.

There has been something of alleviation in worries of Russian supply into Europe. The very public bust up between Austria’s OMV and Gazprom that saw an ending of contract obligations back in November gave rise to the belief that gas supply via Ukraine would cause a real shortfall. However, and according to Reuters, gas flows into Austria and the Czech Republic via Ukraine and Slovakia are at present consistent with recent levels, but the situation remains precarious. The underbelly of Europe is still vulnerable to gas supply shocks, even if the supply from Russia is so much less than before the Ukraine invasion. In the Old Continent, and as of last week, Gas storage levels were registering 69% of capacity whereas at this time of year the five-year average is usually 75%.

We will always maintain the stance that without a healthy product or margin environment, oil prices will not be able to hold onto rallies. The rapid and eye-catching rise in Crude prices hides the progress of Heating Oil and Gasoil. The two contracts most associated with Natural Gas during weather-related episodes are finding substitute bids. As of yesterday, the M1 Heating Oil/WTI futures crack had rallied from $25.50/barrel at the start of the year to $29/barrel and although the M1 Gasoil/Brent futures crack initially fell at the start of the year it has now rallied to $19.50/barrel, over $1 higher than at the start of proceedings. An elongated winter period in the Northern Hemisphere which drives Gas demand will continue, at least in the short-term, to prop oil prices and although cold weather always ends, the synchronisation with sanction anxiety in energy markets will prove a real boon for bulls. Keep an eye on politics, but at present it is also advisable to watch the weather forecasts.

Overnight Pricing