Sliding oil puts focus back on demand-supply fundamentals

01/07/2025 05:50 AST

As the Iran-Israel ceasefire continues to hold after the Islamic republic's barrage of missiles fired at a US base in Qatar last week, the global oil market is once again looking past the geopolitical tensions and focusing on the demand-supply fundamentals.

On Monday, Brent crude futures edged down by 19 cents, or 0.3 per cent, to $67.58 a barrel at 1501GMT, Reuters data showed. US West Texas Intermediate crude was down 62 cents, or 1 per cent, at $64.90 a barrel.

Brent crude surged more than 30 per cent in just three weeks, peaking on Monday, 23 June, before nosediving in its biggest two-day drop since 2022, erasing most of the summer demand and Middle East risk premium gains. Elsewhere, broad strength helped push the Bloomberg Commodities Index to a fresh cycle high on 20 June, only to stumble last week as weakness in energy and grains set in, a note from Saxo Bank's Head of Commodity Strategy Ole Hansen said.

As an immediate consequence of the ceasefire, the risk premium in oil and gas prices, based on possible disruption to traffic passing through the Strait of Hormuz, faded quickly.

Before Israel launched its attacks on Iran on 12 June, the market was heading for oversupply by the fourth quarter of this year.

The eight Opec+ member states that last year announced a 2.2 million barrels per day voluntary production cut have been unwinding that cut since April. Last month, the producer group announced an increase of 411,000 barrels per day (bpd) in July, and is expected to unleash the same amount in August, analysts say.

Geopolitical anxiety, if it does not result in actual supply disruption, tends to burn hot in oil markets but also burn fast, Emirates NBD said in a note. "Even the attacks on the Abqaiq oil processing facilities in 2019 saw a spike in oil from $60 per barrel to almost $70 per barrel in a single day but gains then faded over the subsequent weeks. Oil markets are accustomed to geopolitical risk and there is slack available in the market to absorb at least some of the anxiety over supply security," Edward Bell, Acting Chief Economist & Head of Research, Emirates NBD, told Khaleej Times.

In the absence of a major disruption, oil markets in 2025 look well supplied, the International Energy Agency said. World oil demand is forecast to increase by 720,000 bpd this year, marginally below last month's estimate as weak second quarter deliveries in the United States and China undercut resilience elsewhere. Meanwhile, global oil supply in May was up by 1.9 million bpd from a year ago, led in part by the unwinding of voluntary Opec+ production cuts. For 2025 as a whole, world oil supply is projected to rise by 1.8 million bpd to 104.9 million bpd and by an additional 1.1 million bpd in 2026. Non-OPEC+ producers are forecast to add 1.4 million bpd on average this year and 840,000 bpd next year, the IEA said.

Ann-Louise Hittle, Wood Mackenzie's head of Macro Oils, says that if Opec continues to bring production back at the pace the group has set so far, that cut would be completely unwound by October. "With global oil demand growth sluggish as the world economy faces headwinds, that would lead to a well-supplied market and downward pressure on prices before the end of the year," the consultancy said.

The US Energy Information Administration (EIA) forecasts US crude oil production to decline from an all-time high of 13.5 million bpd in the second quarter of 2025 to about 13.3 million by the fourth quarter of 2026 because of decreasing active drilling rigs and declining oil prices. Last month, active rigs decreased by much more than the EIA had expected, based on data from Baker Hughes. "With fewer active drilling rigs, we forecast US operators will drill and complete fewer wells through 2026. On an annual basis, we now forecast crude oil production will average a bit more than 13.4 million barrels per day in 2025 and a bit less than 13.4 million bpd in 2026," the EIA said.

As a result of rising global oil inventories, crude oil prices is likely to dip further. The Brent crude oil spot price fell for the fourth consecutive month in May, averaging $64 per barrel, down $4 per barrel from April. "We forecast that the Brent price will fall to an average of $61 by the end of this year and average $59 in 2026," the EIA said.

According to LongForecast, WTI prices are expected to remain volatile in 2025, with potential spikes reaching $73.52 in June and pullbacks to $56.01 closer to autumn. The forecast reflects the market's sensitivity to inflation risks, OPEC+ production volumes, and oil demand in China. "Crude oil is likely to trade sideways throughout the year, with each quarter accompanied by a shift in investor sentiment," Jana Kane, analyst at LiteFinance, said.

Khaleej Times