Paisie: With Oil Prices, It’s All About the Economy

We are considering a range of factors that will affect the oil market at the beginning of 2025. Macro-level factors (geopolitics, economics and government policies) will establish a broader context for the oil markets.

In assessing the oil markets, it is always a requirement to consider geopolitics, but while the conflicts in Ukraine and the Middle East continue (along with the recent fall of the Assad regime in Syria), oil prices do not reflect the potential level of risk. Instead, the market has been calmed by the uninterrupted flow of oil. We expect this to continue during 2025.

From an optimistic viewpoint, a negotiated settlement could bring the Russia-Ukraine conflict to a close. It is also possible that the Middle East could be entering a period in which there is respite in the tit-for-tat between Israel and Iran (and proxies), while the situation in Syria could proceed without devolving into sectarian violence and clashes fostered by outside parties. While there is plenty of potential for chaos—especially with respect to the Middle East—the optimistic view reflects our base-case expectations, which translates into geopolitics not being a major driver of oil prices during 2025.

In contrast to geopolitics, we think that economics will be a major driver for oil prices. We are expecting that the U.S. economy will continue to exhibit strength, which will be supported by easing monetary policy, while the EU economies will continue to struggle with downside risks stemming from the possibility of increased tariffs imposed by the incoming Trump administration.

Especially vulnerable is the European manufacturing sector, which has contracted by 6% since January 2022, in part, from the higher energy costs associated with the beginning of the Russia-Ukraine conflict.

The biggest source of economic uncertainty is associated with China’s economy. China’s economic growth is under pressure from the threat of additional tariffs from the U.S. In November, the congressionally chartered U.S.-China Economic and Security Review Commission recommended that the U.S. remove the “most favored nation” status for China. The removal of the status would result in all of China’s exports to the U.S. ($427 billion in 2023) being exposed to tariffs ranging from 35% to 100%. Trump has indicated that he will impose tariffs of 60% on Chinese imports.

Government policies in recent years have been supportive of alternative fuels and the electrification of the vehicle fleet. With political gains being made by the right-wing parties, some of the momentum will be stifled this year, both in Europe and, most notably, in the U.S. where the policies and incentives enshrined under the Inflation Reduction Act (IRA) of 2022 are at risk.

The Trump administration could scrap tax incentives aimed at fostering investment in clean technologies, including electric vehicles (EVs), low-carbon hydrogen and renewable fuels. Although part of the IRA package is expected to be downsized, it will be complex for the next administration to completely repeal the scheme, as it is estimated that in the EV and battery sector only, it has attracted around $110 billion in investments in U.S. territory—with much of the investments placed in states that expressed a Republican majority.

Delay from OPEC+

Within the context of the macro-level factors, supply and demand fundamentals will underpin oil prices.

In alignment with our expectations for economic growth, growth in oil demand will be heavily dependent on the extent of demand growth in Asia with the growth stemming from China, India and other developing Asian countries.

As we have been highlighting and expecting, OPEC+ announced at its December meeting that its members will continue to delay the unwinding of supply cuts. Given the level of oil prices and the supply/demand dynamics, OPEC+ had plenty of incentive and supporting rationale to delay any change to its supply until the beginning of the second quarter.

The delay will provide time for OPEC+ to learn more about the intentions of President Donald Trump, who has discussed policies that are positive and negative for oil prices. With the latest delay, the unwinding of production cuts will take until Dec. 31, 2026.

With OPEC+’s delay in unwinding its supply cuts and our outlook for non-OPEC supply, we are expecting that oil demand will outpace oil supply through much of 2025. While this deficit will be supportive of crude prices, the extent of spare capacity of around 6 MMbbl/d will put downward pressure on oil prices.