Sanctions (Weekly summary 18/01)

There have been quite a few interesting events to analyze this week, and below I list the most noteworthy news. Let’s get started:

• The new U.S. sanctions on Russian oil producers and transporters are driving a transformation in global energy flows, forcing China and India, the primary consumers of Russian crude, to seek alternatives in other markets. With sanctions targeting companies like Gazprom Neft and Surgutneftegas, as well as blacklisting 183 ships, a sharp contraction in Russian maritime exports is expected.

  The immediate impact is reflected in rising oil prices. According to Kpler, the sanctioned ships handled 42% of Russia’s seaborne crude exports in 2023, with China and India as the main destinations. If these sanctions are strictly enforced, they will significantly reduce the fleet available to transport Russian oil, driving up shipping costs and disrupting supply flows.

  

   

  The growing competition for crude from the Middle East and the Atlantic, coupled with additional restrictions on Iranian oil—which is also under sanctions—is intensifying pressure on regional benchmarks like Dubai and widening the spread with Brent. U.S. sanctions, which in the case of Iran are likely to increase, are causing a significant adjustment in global energy flows, with immediate economic consequences for Russia. However, they are also affecting the main consumers of Russian crude, who must quickly adapt to a tighter and more expensive market.

• Israel and Hamas have reached an agreement to cease hostilities in Gaza and conduct a prisoner exchange involving Israeli hostages and Palestinian detainees, which could mark the end of a 15-month war that has destabilized the region. This deal, mediated by Egypt and Qatar with U.S. backing, comes at a critical juncture, just before Donald Trump’s inauguration as President of the United States on January 20.

  The conflict, which began on October 7, 2023, with a Hamas attack that killed 1,200 Israelis and resulted in over 250 hostages being taken, led to a devastating Israeli invasion of Gaza. Trump’s pressure to finalize the agreement was decisive, as he made it clear there would be “severe consequences” if the hostages were not released before his inauguration. In Israel, the return of the hostages could alleviate public outrage directed at Prime Minister Benjamin Netanyahu and his government over the security lapse that triggered the crisis.

  The agreement significantly reduces tensions in a region that was turning into a pressure cooker and has major implications for the energy sector, as the likelihood of disruption decreases sharply. It also benefits maritime transportation, with the normalization of traffic through the Red Sea and the Suez Canal now appearing much closer.

  • The cold continues—and will continue—to make its presence felt in Europe and the United States. This week, Europe has plunged under a blanket of sub-zero temperatures, clearly below the historical average. Only the Nordic countries stand apart from this trend, with equally freezing temperatures but higher than what they are accustomed to. The main obstacle preventing natural gas prices from gaining further traction is the divergence between the Atlantic basin, where winter is hitting hard in both the United States and the aforementioned Europe, and the Pacific basin. Ultimately, this is a significant factor, as the primary region for LNG consumption and imports globally is Asia, which accounts for about two-thirds of global volumes. In the absence of cold weather, natural gas inventories in China, Japan, South Korea, and Taiwan are at very comfortable levels; more importantly, they lack the need to compete for shipments—as they did in 2022—which ultimately created the perfect conditions for prices to enter a parabolic phase. Once a certain threshold is reached, these countries—led by China—simply reduce their purchase volumes, generating a surplus that can be redirected to other more strained regions.

    

     

    In fact, the sharp rise in the TTF was not so much due to weather-related issues but rather geopolitical factors. Although it went largely unnoticed, on Friday, coinciding with the surprise announcement by the U.S. Treasury Department of sanctions against more than 180 tankers belonging to Russia’s shadow fleet, attention was also directed at two LNG export terminals managed by Gazprom and Novatek: Portovaya and Vysotsk. While the volumes they handle pale in comparison to the figures from Sakhalin-2 in the Pacific or directly from Yamal in the Arctic, nearly all their cargo was traditionally destined for European markets. This adds to the loss of another previously stable supply route: the overland gas pipeline crossing Ukraine that supplied Hungary, Slovakia, and Austria. The loss of these three infrastructures represents a gap equivalent to about 13 million tons of LNG that Europe will need to cover through imports from other countries.

    

     

• We have been discussing for a few weeks how the main oil market analysis agencies are significantly mistaken in their forecasts, which are excessively pessimistic. I wanted to bring you the specific figures we are referring to. In the following chart, you can see that while they agree on the expected demand increase for 2025 (~1.2 Mb/d), both the starting point and, above all, the increase in Non-OPEC supply cause significant divergences in expectations.

  

   

  Much of these hopes for supply growth are based on the United States, where the dynamic for 2025 seems marked by a moderation in production growth among major U.S. shale producers, with the exception of Occidental and Exxon. These companies plan significant but relatively limited increases: ~50 thousand b/d for Occidental and ~75 thousand b/d for Exxon, considering all liquids. This restrained growth contrasts with stagnation among other producers, putting pressure on total supply. To reach production levels of ~13.65 million b/d in the U.S. by 2025, a significant increase in capital expenditure, estimated at ~15% to ~20%, would be necessary. Without this increase, achieving that figure becomes extremely challenging, especially in a context of rising prices.

  The physical market is beginning to doubt this narrative, as both crude prices (bolstered by sanctions), which surpassed $80/b WTI during the week, and, more importantly, physical indicators (time spreads), are signaling a different reality.

  

   

  If U.S. oil inventories fail to increase during the first quarter, the market is likely to quickly adjust its narrative.

  Within OPEC itself, we are also beginning to see greater compliance (or challenges) among some producers, such as Russia, whose volumes show a clear moderation, adding to the issue we’ve described.

  

   

  Despite the narrative, we are witnessing a world where oil demand, supported by a petrochemical sector with strong tailwinds, continues to grow—albeit at a very moderate pace—while supply increasingly faces challenges, some geological and others political. The Royal Bank of Canada perfectly defined this second cause:

  The UK is a country with the reserves in the North Sea to be self-sufficient in gas for many years to come. Yet oil companies are being stymied in developing new fields due to a nihilistic climate agenda. Nihilistic, in that such obstruction means that the UK is forced to import LNG from far afield – only adding to Scope 3 emissions in the process.

  Amen.

Model Portfolio

Attached are the two main tracking materials we’ll obtain via this platform, along with a more detailed explanation:

• In the first chart, you can see, for each period, the performance of our model portfolio (blue line) compared to the S&P 500 (green), the iShares MSCI EAFE ETF (yellow, representing developed markets outside the U.S.), and the Vanguard Total World Stock ETF (pink).

  

   

• In the second table, we’ve added risk and performance metrics, such as the Sharpe and Sortino ratios, which indicate risk-adjusted returns (the higher, the better), as well as volatility and average return. In this case, you can see that our portfolio, so far this year, has delivered better returns, lower drawdown, and lower volatility. A perfect combination.

  

   

The model portfolio’s return is +4.84% YTD compared to +2.01% for the S&P500, and +70.85% versus +45.48% for the S&P500 since inception (September 2022). The model portfolio, as of Friday’s close, is as follows: