OIL FUTURES: Crude prices pare gains on profit-taking; focus on looming supply glut, strong dollar

Crude oil futures pared gains in midmorning Asia trade Jan. 14 as additional sanctions imposed on Russia's energy sector could likely be absorbed by global spare capacity, even as US President-elect Donald Trump's policies and a strong dollar remain in focus.

Front-month ICE Brent prices climbed to near five-month highs in the Jan. 13 US close at $81.01/b, rising $1.25/b or 1.57% on the day, with the previous high being the Aug. 26 settle at $81.43/b.

At 11 am Singapore time (0300 GMT), the ICE March Brent futures contract fell 39 cents/b (0.48%) from the previous close at $80.62/b while NYMEX February light sweet crude contract eased 33 cents/b (0.42%) from the previous close at $78.49/b.

"On the supply side, the short-term market players often succumb to recency bias regarding sanctions, losing sight of the bigger picture: the potential for increased supply amid medium-term risks of weaker global demand," SPI Asset Management's Managing Partner Stephen Innes told S&P Global Commodity Insights Jan. 14.

The White House announced fresh curbs on more than 180 shadow tankers Jan. 10, bringing the total US blacklist to more than 470 ships. In addition to the major expansion blacklist, the US Treasury Department sanctioned swathes of oil traders, insurance companies and energy officials it believes are facilitating the export of Russian oil, resulting in global crude prices hovering above $80/b for the first time in more than three months.

However, analysts said the newfound strength in the complex is likely to be short-lived.

"When the initial buying frenzy wanes, it becomes apparent that sanctions on Iran could be effectively counterbalanced by OPEC's spare capacity. Consequently, compelling sell offers above $81 likely prompt some profit-taking," Innes added.

"These sanctions have the potential to take as much as 700k b/d of supply off the market, which would erase the surplus that we are expecting for this year. However, the actual reduction in flows will likely be less, as Russia and buyers find ways around these sanctions – clearly there will be more strain on non-sanctioned vessels within the shadow fleet," ING's Head of Commodity Strategy, Warren Patterson, along with commodity strategist, Ewa Manthey said in a note Jan. 14.

The oil market will be heavily oversupplied by 2026 as the OPEC+ alliance tapers production cuts, Saudi Arabian think tank KAPSARC said Jan. 13.

In its latest quarterly market forecast, Riyadh-based KAPSARC said it expects a 260,000 b/d surplus in 2025, rising to 1.01 million b/d in 2026, affirming fears of an impending glut.

Furthermore, Alberta's crude oil producers -- and some US refiners -- should brace for a 25% tariff on Canadian crude exports to the US likely to be introduced Jan. 20 by the incoming US administration, provincial Premier Danielle Smith said Jan. 13.

SPI's Innes also noted that "this relentless climb [of the dollar] is exerting significant pressure on emerging and Asian economies."

An appreciating dollar will result in dollar-denominated assets such as oil futures becoming less affordable to consumers using foreign currencies.

The ICE US Dollar Index stood at 109.46 at 9:42 am Singapore time (0142 GMT) on Jan. 14, gaining 0.23% since the start of the month.

US oil inventories to contract

US crude oil stocks likely declined in the week to Jan. 10, analysts surveyed by Commodity Insights said Jan. 13, as refinery runs held unseasonably strong despite an expected decline.

Commercial crude stocks dipped 900,000 barrels to around 413.7 million barrels, analysts forecast, marking an eighth straight week of drawdowns. If confirmed by the US Energy Information Administration, it would mark the longest consecutive stretch of declining inventories since summer 2021.

More definite data will be released by the American Petroleum Institute later Jan. 14 and the EIA Jan. 15.

Dubai swaps

The March Dubai swap was pegged at $78.44/b at 11 am Singapore time (0300 GMT) Jan. 14, dipping 94 cents/b (1.18%) from the previous Jan. 13 Asian market close.

The February-March Dubai swap intermonth spread was pegged at $1.31 cents/b, down 4 cents/b, while the March-April Dubai swap intermonth spread was pegged at $1.15/b, remaining steady over the same period.

The March Brent-Dubai exchange of futures for swaps was pegged at $2.18/b, increasing 29 cents/b from the previous Asian close.