Oil market faces uncertainty amid policy shifts and supply risks

The global oil market remains volatile as crude oil prices continue to fluctuate due to uncertainty in U.S. policies, shifting trade dynamics, and ongoing geopolitical tensions. According to the latest Oil Market Monthly Report, crude oil prices saw consecutive declines in early 2025 but stabilized in recent weeks, trading at levels similar to those seen before the announcement of Russian sanctions.

The report highlights key factors influencing crude oil prices. Market uncertainty stems from potential U.S. tariff policies and discussions of a peace deal between Russia and Ukraine, which could lead to a resumption of Russian crude oil exports. Additionally, higher U.S. inventories, increased Russian crude purchases by Asian buyers before sanctions took effect, and a strong U.S. dollar have contributed to price movements.

Conversely, oil prices received some support from potential new sanctions on Iran and recent attacks on oil facilities in Russia and Ukraine. Global demand is also being affected by trade tensions, as tariff-led trade wars could reduce world GDP by around 1%, according to estimates. However, rising natural gas prices in Europe have reignited discussions about increasing oil use for electricity generation, which could provide some demand support.

The impact of sanctions on Russian and Iranian crude has resulted in a significant increase in the amount of crude oil stored on sanctioned tanker ships. This has escalated costs for refiners, with transportation expenses rising between USD 2 to USD 3 per barrel, while non-sanctioned tanker rates have nearly tripled compared to pre-sanction levels. Reports from Kpler indicate that floating Iranian oil storage reached its highest level in over a year, surpassing 25 million barrels, while Russian crude stored on ships hit a two-month high of 88 million barrels by the end of January 2025.

Changing Trade Patterns: Asia’s Growing Role

Buyers in the crude oil market are adjusting their strategies to comply with sanctions, leading to structural shifts in trade flows. China is expected to increase purchases of U.S. crude oil and LNG to address trade imbalances, while India may compensate for tariff-driven declines elsewhere. Additionally, Asian imports of crude from Angola and Brazil are projected to rise sharply in February 2025.

Oil Price Trends and Forecasts

Crude oil prices reached their lowest levels since the start of the year, hovering around USD 74 per barrel. Bloomberg data showed that the Brent crude prompt spread narrowed to its weakest since November 2024, signaling a weakening market. However, monthly price trends show that crude prices made gains in January 2025, with Brent crude rising 7.5% to USD 79.3 per barrel, marking its biggest monthly growth in 16 months. Similarly, the OPEC reference basket price saw an 8.6% increase, its highest monthly gain in nearly three years.

Looking ahead, forecasts for Brent crude oil prices over the next six quarters suggest a moderate upward revision. Analysts expect prices to stabilize around USD 75 per barrel in Q1 2025, with modest declines to USD 73 per barrel by Q4 2025.

Global Oil Demand and Supply Outlook

The OPEC forecast for 2025 maintains global oil demand growth at 1.4 million barrels per day (mb/d), with total demand expected to average 105.2 mb/d for the year. While OECD Americas demand forecasts were slightly revised downward, stronger-than-expected consumption in OECD Europe and Asia-Pacific helped balance the outlook. In contrast, China’s demand growth projection was lowered, partially offset by higher demand expectations in India and other Asian markets.

On the supply side, global oil supply declined by nearly 1 mb/d in January 2025 due to seasonal factors, production disruptions in Nigeria and Libya, and refinery maintenance in the U.S. The IEA projects global oil supply to rise by 1.6 mb/d in 2025, with non-OPEC countries driving most of the growth. Meanwhile, Russia’s oil output is expected to drop below 9 mb/d, particularly if tanker shortages and refining disruptions persist.

OPEC Production and Market Adjustments

OPEC crude oil production declined for the second consecutive month, averaging 27 mb/d in January 2025. A key factor was the 0.3 mb/d drop in Iraq’s output following a fire at the Rumaila oilfield, one of the country’s largest production sites. Despite the incident being controlled, output restoration remains uncertain. Meanwhile, the OPEC+ alliance reaffirmed its commitment to increasing production in April 2025, though compliance with output cuts remains a challenge for some member states.

A Market in Transition

The oil market remains at a crossroads, influenced by a mix of policy shifts, geopolitical tensions, and supply-demand rebalancing. While prices are stabilizing after early 2025 declines, market participants continue to monitor U.S. policy developments, China’s demand trajectory, and the evolving impact of sanctions on global crude flows. As OPEC+ prepares to adjust production quotas in the coming months, the oil sector faces an uncertain but dynamic year ahead.

Source: Kamco Investment