By Oil has had a stellar start to the new year with prices climbing more than 3% since the close on December 31.
The positive start to the year is despite a comfortable outlook for market balances in 2025.
Increasing demand for crude grades from the Middle East has added to the optimism, while hopes of rising consumption from China have also buoyed sentiments.
Forecasts of a colder winter in the Northern Hemisphere have also aided demand for crude for heating offices and homes.
At the time of writing, the price of West Texas Intermediate crude oil was at $73.75 per barrel, down 0.3%.
Brent crude oil on the Intercontinental Exchange was at $76.22 a barrel, down 0.4% from the previous close.
However, the recent strength in the dollar has weighed on prices somewhat on Monday.
The dollar stayed close to a two-year peak on Monday. A stronger greenback makes commodities priced in the US currency more expensive for overseas buyers, thereby limiting demand.
The question remains whether oil bulls can continue their strong run in the upcoming weeks, or will the dollar’s strength prove to be damaging.
Strong physical market in the Middle East
Recent reports of further sanctions on Russian crude oil supply have led importers to turn their attention elsewhere.
Analysts at ING Group said:
The strength in the market appears to be on the back of a stronger physical market in the Middle East.
This is well reflected in the Brent/Dubai spread which has traded into negative territory recently.
Since Russia invaded Ukraine in early 2022, several Western powers have imposed heavy sanctions on Moscow’s energy exports.
This presented an opportunity for buyers in Asia as more Russian oil was available in the market at a steep discount.
For nearly three years, Russia has diverted most of its crude exports to major Asian buyers such as India, China, and others.
However, recently the US and Europe have been planning on imposing further sanctions on tankers carrying Russian oil. This is to halt Russia’s war efforts against Ukraine by straining its oil revenues.
“There are suggestions that Asian buyers have been looking to other Middle Eastern grades amid broader sanctions against Russia and Iran,” ING Group’s analysts said.
Additionally, recent reports have also shown that major refining companies in India are planning to import more oil from Middle Eastern countries.
Experts believe that Saudi Arabia is expected to raise the official selling price of crude oil exported to Asia for February. This could confirm an increase in demand for Middle Eastern supplies from Asia.
Looming oil supply disruptions
Supply disruptions are likely if Republican Donald Trump pursues tougher implementation of sanctions on Iran’s oil exports.
Iran produces about 3.3 million barrels per day of crude oil, and exports most of it to China.
However, there are fears that Trump may impose additional sanctions on Iran, which may limit exports from the country.
Iran was able to increase its oil exports over the last couple of years as the incumbent US President Joe Biden did not pursue stricter compliance with sanctions. This may change when Trump takes office at the White House later this month.
Meanwhile, a Reuters report on Monday also claimed that the US was planning further sanctions on tankers, carrying Russian oil.
In such a scenario, oil supply from Russia may be affected as Asian buyers may look at other options. Russia is one of the top exporters of crude oil.
“Looming sanctions and potential supply reductions from major producers are intensifying market uncertainty,” Arslan Ali, derivatives analyst at FXempire, said in a report.
ING Group’s head of commodity strategy, Warren Patterson, said:
Stricter enforcement of sanctions against Iran would leave the market tighter than expected. However, it would also leave an opportunity for OPEC+ to increase supply.
Rising China demand
Oil had risen over the last five trading sessions on the back of renewed hopes of rising demand from China.
China’s President recently announced that the country would employ proactive measures to boost its economy.
This is positive for oil demand as the country is the world’s biggest importer of crude.
In 2025, the International Energy Agency expects the crude oil market to be oversupplied by a little over 1 million barrels per day.
However, if demand from China recovers and supply disruptions from Russia and Iran materialise, market balances could improve, raising prices.
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