Paisie: How a World in Flux Impacts Oil Prices

Since last month’s article, there has been plenty of headline-generating news. When assessing the oil market, however, it is important to carefully consider the factors that will have a real impact—and not get distracted by the headlines.

Currently, the conflict between Russia and Ukraine and the conflict between Iran and Israel still have the potential to escalate and entangle major powers in direct military action. While efforts are being made to resolve both conflicts, more twists and turns are likely before negotiated settlements are reached. Consequently, these conflicts remain wild cards, with each having the potential to produce a significant shock to the oil market.

Putting aside these conflicts, what about the other developments that are dominating the news?

Restricting Russia, Iran, Venezuela

The Trump administration seems intent on restricting oil exports from Russia, Iran and Venezuela. It has been our view and remains our view that the administration will have the most success in affecting oil exports from Venezuela because of the ability to directly affect Venezuela exports to the U.S., which have been running around 240,000 bbl/d, representing around 25% of Venezuela’s total oil production.

We think it will be more difficult to affect Iran’s oil exports with 90% of Iran’s exports going to China using China’s currency and non-western shipping services. Russia has proved to be adept at getting around sanctions, and even with the Trump administration threatening additional sanctions, we expect the impact on Russian export barrels will not be substantial.

The OPEC factor

Another factor is the growth of non-OPEC crude supply. Currently, we are forecasting that non-OPEC supply will increase by less than 1 MMbbl/d in 2025. Embedded in this forecast is that crude production in the U.S. will see only nominal gains in 2025. While President Donald Trump is pushing for additional production, it has been our viewpoint that U.S. shale oil producers will remain focused on maximizing shareholder value. So far, we do not see any justification to alter this viewpoint.

We are also expecting that OPEC will not increase supply in 2025. Even with members of OPEC+ reiterating that they will start unwinding their supply cuts in 2025, we expect that the unwinding will be done at a slow pace with an eye on oil prices and not getting ahead of demand.

Tariffs and demand

Tariffs have been increasingly in the news—and more tariffs are likely—although the situation is fluid, with Trump exhibiting the willingness to adjust based on feedback from affected sectors and companies, and from discussions with opposing countries.

Editor’s note: President Trump announced new rules for tariffs on April 2. A 10% tariff will be imposed on goods from all countries, and additional tariffs for specific countries.

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The imposition of tariffs and the threat of tariffs, however, is adding another dimension of uncertainty to the global economic outlook, which is already fragile. Each of the major economies—U.S., Europe and China—face challenges. A slowdown in the global economy will ultimately affect oil demand.

We are currently forecasting that oil demand will increase by 1.3 MMbbl/d, with about 60% of the demand growth associated with Asia. This includes demand growth in China and India. We are also forecasting the U.S. will experience demand growth this year. The other regions are forecasted to have flat or negative oil demand growth in 2025.

Based on our current base-case forecasts, we are expecting that demand will outstrip supply during the second, third and fourth quarters of 2025.

OPEC+ has the flexibility to manage its supply to align with demand unless there is a major disruption to demand, which we think unlikely, in part because of the increasing ability of central bankers to ease monetary conditions, given the improving inflation outlook. Additionally, U.S. shale oil producers are likely to pull back on drilling activity if oil prices drop.

Another factor affecting oil prices is that the sentiment of oil traders is very bearish, with traders being sensitive to any negative news. With the sentiment so bearish, there is a potential for a swing in sentiment if the news and data start surprising to the upside. A weaker U.S. dollar could also provide some upward support for oil prices, but the extent of the benefit will depend on which currencies the dollar is depreciating against—if it is the euro, the depreciation will not make much difference.

What does all this mean for the oil prices in 2025? We think that a floor has been put under oil prices with $70/bbl for Brent crude and $66/bbl for WTI. Breaking through the price floors is possible, but sustaining low oil prices will require more than a minor slowdown in the global economy.