Mita Chaturvedi
Research Associate, Flux
Cooking up a Winter Storm
owever, the rally met resistance, and we expect the contract to slip lower by the end of the week unless we see a material hit to refining..
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View: $63.00-66.00 (Neutral-to-Cautiously Bearish)
The front-month Brent futures contract climbed to a high of $66.55/bbl this morning (on 26 Jan), supported by fears of disrupted US production amid Winter Storm Fern. However, the rally met resistance, and we expect the contract to slip lower by the end of the week unless we see a material hit to US refining infrastructure. Technically, 26 Jan’s price action has printed a “doji”, underlining market indecision at these high levels, aligning with our view.
Key drivers of prices to monitor this week include:
- Players seek OTM Put Options Despite the Bullish News
- Tengiz Resumes Output
- US-Iran tensions
Players seek OTM Put Options Despite Bullish News
Extremely cold weather struck the US over the past week, intensifying over the weekend and forcing shut-ins in key crude and natural gas-producing regions. Roughly 1 million people reportedly lost power across Southern regions, supporting heating oil demand. On the supply side, the risk is refinery disruption, as most refineries are designed to operate between 0 and 35 degrees Celsius. According to JP Morgan, some 250kb/d of crude oil production has been lost due to weather conditions, affecting areas such as the Bakken field in North Dakota and parts of Texas. Near-term cold may keep a floor under prices, but we expect Brent to soften unless refinery outages deepen. Consistent with this, implied volatility for out-of-the-money put options rose w/w on 26 Jan, signalling increased demand for downside protection.
Tengiz Resumes Output
On the physical side, Dated Brent has been supported by high freight rates and disruptions to CPC crude exports, which have boosted demand for North Sea crude. Nevertheless, the Caspian Pipeline Consortium (CPC) said on 25 January it had returned to full loading capacity at its Black Sea terminal after maintenance at one of its three mooring points (SPM-3). Meanwhile, Kazakhstan’s largest oilfield, Tengiz, is set to gradually resume production “in the near future” after halting on 18 Jan. Nevertheless, despite the bearish optics from this news, Kazakhstan’s Energy Ministry said volumes remain low, and the force majeure on CPC Blend exports remains in effect. The field is producing roughly 60 kb/d alongside the Korolev field, around 6% of typical levels, which, along with persistently high freight, may continue to provide a floor for prices, notably for physical differentials such as the Dated vs Dubai spread.
US President Trump Claims “Armada” Headed for Iran
On the geopolitical front, last week, aboard Air Force One, US President Donald Trump claimed the US had an “armada” headed towards Iran, “just in case”, and reportedly deployed the USS Abraham Lincoln to the Middle East. He reiterated warnings to Tehran against executing protestors or restarting its nuclear program. Meanwhile, a senior Iranian official responded that any attack would be treated “as an all-out war against us.” More recently, the semi-official Iranian Students News Agency (ISNA) reported that Iran’s Foreign Minister Abbas Araghchi and US Special Envoy Steve Witcoff are exchanging messages informally. However, the talks “can hardly be called a negotiation”, per Iran’s Ambassador to Geneva, keeping geopolitical risk in place. Thus, despite expectations of a short-term price correction, we expect a floor around $63-64/bbl in the near term.
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