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Sanctions rattle energy markets

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

 

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: soojin.kim@ae.mufg.jp

 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Global commodities

Oil has rallied to five-month highs after the US announced its broadest and strictest sanctions on the Russian oil sector since the war in Ukraine commenced in 2022. What distinguishes these sanctions compared with previous iterations are three-fold. First, they are the most wide-reaching in scope and scale, targeting two Russian oil majors, 183 Russian vessels, oilfield service providers, insurance companies, energy officials and dozens of traders. Second, they are aimed at reducing Russia’s oil production, unlike prior measures, which sought to curtail Russian oil revenue whilst preserving supplies. Third, the Trump administration is unlikely to reverse the measures in the absence of the implementation of a future peace agreement with Ukraine. With Brent crude up ~10% year-to-date, reading the market is now more complicated than it was a few weeks ago and the upswing is testing our bearish 2025 oil narrative based on loosening fundamentals. On net, today’s oil price strength is not sustainable in our view for three reasons. First, Russia has a track record in aggressively discounting its oil to incentivise shipping by a shadow fleet and continued purchases by price-sensitive customers. Second, OPEC+ has ample (~6m b/d) spare capacity that can be bought online to withstand such tightening shocks. Third, and more broadly, global markets are still expected to swing into a protracted surplus and remain oversupplied for much of this year.

Energy

Oil’s surprise ~10% surge year-to-date on the back of stricter US sanctions on Russia’s oil sector, the lower-than-expected US CPI reading for December alongside upward global oil demand revisions from the IEA, is testing the bearish narrative for 2025 that’s anchored on oversupply and ample OPEC+ spare capacity. Yet, the gains may prove short-lived with aggressive Russian crude discounting, ample OPEC+ spare capacity and the anticipated incoming US administration’s strategy of lower US energy prices, collectively set to keep prices capped to the upside. Meanwhile, volatility in European gas markets is here to stay with TTF price risks remaining skewed to the upside on colder-than-average weather, storage depletion, intensified LNG competition from Asia and reports that the EU is planning to phase out Russian LNG as part of a new package of sanctions.

Base metals

According to unconfirmed reports that cite European Union diplomats, the European Commission intends to propose a ban on the import of Russian aluminium as part of its 16th sanctions package. European imports of Russian aluminium have already been declining, and now account to ~360ktpa (~6% of total imports). The scale of the impact will be conditional on whether volumes can be re-routed.

Precious metals

Gold’s brisk start to the year comprises the impetus to go much further in the short-term with the incoming US administration set to drive the “fear” dimension (geopolitical hedge of first resort) of our constructive bullion thesis this year. Also, EM central banks continue to be purchase bullion through the “wealth” dimension.

Bulk commodities

Iron ore prices have surged above USD100/MT as China’s annual imports hit a record 1.24bn tons, accompanied by a record USD992bn trade surplus in 2024. Yet, weakening Chinese sentiment continues to mire the complex as both macro data and new stimulus measures have disappointed. Meanwhile, the potential for across-the-board US tariffs poses downside risk to our iron ore price forecast due to the likely negative impact on global GDP growth. While we already forecast declining Chinese steel demand, our base case is for recovering ex-China demand to drive an increase in global seaborne iron ore consumption in 2025.

Agriculture

Grains – wheat, soybean and corn – prices are fluctuating between gains and losses as traders weigh data showing US exporters sold several cargoes to China over the last week.

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.