Oil Market Monitor - Market surplus and tariff risks ahead

Just before leaving office in January, US President Joe Biden triggered a rally in oil markets after imposing wide sanctions on Russian oil and gas targeting more than 160 entities. Subsequently, Brent prices floated briefly above 80$/b before declining again towards pre-sanction levels. The new Russian sanctions were not expected to affect oil markets fundamentally as the market is well supplied with spare capacity driven by many other OPEC+ members and the high expected output by non-OPEC producers which can compensate the decrease in Russian crude. Furthermore, a market surplus is widely anticipated by main international agencies even if OPEC+ does not step up production as supply additions outpace demand growth. However, the market is pricing in a geopolitical premium, triggered this time by (trade) policy uncertainty of the new US administration, and its potential impact on growth, trade flows, and the strength of the dollar, along with the freshly imposed sanctions on Iran by President Trump aiming to put maximum pressure on the oil exporting country. Brent is now trending at around 75 $/b.

Oil market developments

Just before handing over the keys to the White house to his successor, President Joe Bidon announced new sanctions on Russian oil and gas sectors. The sanctions were considered the strictest up to that time targeting producers, traders, and insurance companies involved in facilitating the flow of Russian oil to India and China. The announcement of the sanctions triggered a surge in prices to levels last seen during the summer. However, in our view, sanctions are not expected to greatly alter market fundamentals rather it will induce a shift in Indian and Chinese demand towards other OPEC+ countries, which will not be challenging given the current spare capacity at the cartel and its allies.

In its December meeting, OPEC+ once again agreed to keep its voluntary cuts on hold in the first quarter of 2025 and aim to revive production in April. The cartel announced in June the phase out of their voluntary cuts that aim to put 2.2 million barrels of oil back into the market over the period of a year starting in October 2024. However, due to adverse market conditions, they decided to postpone these plans for an additional quarter. Currently, OPEC+ spare capacity amounts to more than 5.85 million barrels a day. The idle OPEC+ capacity would provide a buffer for any supply disruptions, mitigating the volatility in the market.

In its latest report, the IEA revised downwards its expectations for the market surplus in 2025 towards 0.7 mb/d (was 0.9 mb/d), assuming an extension of voluntary cuts. At the same time, the EIA foresee a surplus of 0.3 mb/d as they have higher supply estimates and lower demand forecasts compared to their initial forecasts. OPEC remains the most optimistic about global oil demand among the three agencies. However, OPEC reduced its demand forecasts towards 105.2 mb/d, anticipating a supply deficit of around 1.6 mb/d. All agencies share the view that supply from non-OPEC+ countries would keep rising in 2025. More supply is especially expected from the US, Guyana, Canada, Brazil, and Norway.

The well supplied market is also reflected by a number of key indicators, such as the Brent-gasoline crack spread, which has been fluctuating around 10 $/b since September 2024, revealing the weakness of oil product cracks across the barrel, which in turn suggests a neutral impact on prices (see left hand chart above). On the other hand, US crude inventories have been decreasing since November. These inventories are set to build up in 2025 with aforementioned expected supply surplus in 2025.

Geopolitical risks associated to the Middle East have diminished after the fall of the Assad regime in Syria, the ceasefire in Gaza and the de-escalation of a direct conflict between Israel and Iran. However, risks are now initiated in the west, with high uncertainty surrounding possible US tariffs on its imports from major trading partners such as Canada, Mexico, China, and the European Union. The uncertainty is not only on implementation of the tariffs, but also on their levels. Which induces high risks and great implications on trade flows, growth rates and the strength of the dollar, all of which affect oil market fundamentals. Furthermore, the new US President has just imposed new sanctions on Iran aiming to deliver maximum pressure on the country, adding ambiguity to the future of Iranian supplies. These developments increased market uncertainty triggering bullish sentiment in the market, which became dominated by long traders, as shown in the figure above.

The impact of Trump policies on oil markets

As communicated in our last update (see here), the policies associated to Trump presidency are expected to incentivize more oil supply from the US following easer regulation and lower corporate taxes, which would strengthen further the financial status and competitiveness of the US oil producers. This will deepen the expected surplus in the market and put a downward pressure on prices, something that President Trump is very much focused on. However, there is a limit to this channel as lower prices would also feedback into lower supply in the US because of the relatively higher cost needed for shale oil to retain profitability in comparison to the other countries like those in the Middle-East.

On the other hand, the tariffs that have been imposed (with some of them postponed) on major trade partners, such as Canada, Mexico, China, and the European Union would affect oil demand negatively, because of their impacts on lower trade flows, mitigated growth rates, and stronger dollar, all of which would weigh on oil prices. Tariffs would affect oil demand through several channels. As mentioned above, we would see lower industrial production and growth rates more generally. In addition, there would be impact on the speed of the transition, especially the rollout of electric vehicles (EV). Tariffs would increase EV prices in main markets and reduce their adoption rate, which in turn keeps oil demand for transportation purposes higher for longer. Still, we think that the former negative impact on oil prices will dominate any upward pressure from slower rollout of EVs.

We lay down our expectations for US tariffs in detail in our global outlook for 2025 (see more here) and in our recent global monthly (here), where we argue that tariffs will have a temporarily positive effect on growth in the eurozone and China, as US importers frontload purchases to avoid higher tariffs. However, this impact will be short-lived with exports likely to see a sharp decline immediately after tariffs are implemented. Trade later will settle at its post-tariff new normal, affecting expected growth rates adversely for all trading partners. But, the timing of this impact will differ along 2025 for each party. The negative impact on the economy will be deeper with higher levels of implemented tariffs. Furthermore, the tariffs will induce a divergence in interest rates across the Atlantic. Accordingly, we retain our view that oil demand could benefit initially from a frontloading positive impact of the tariffs, which would partly offset the excess supply, but later in 2025 these tariffs would depress demand even further.

Outlook

We retain our view of a market surplus in 2025. This is given the lackluster global demand and the strong supply form non-OPEC+ countries, which is expected to increase even further under the new US administration’s policies. We think that the new sanctions on Iran and the uncertainty of the extent and the level of American tariffs, along with the potential positive frontloading impact of expected tariffs would put an upward pressure on prices, while the idle OPEC+ capacity would mitigate volatility and put a lid on price increases. As things clear out along 2025, we expect prices to see a decrease driven mainly by the slowdown in demand growth. Accordingly, we revise our outlook for Brent upward to average 74 $/b in Q1 of 2025 (was 70 $/b). We hold our outlook for the rest of 2025 where Brent is expected to end the year with 60$/b. Below is a summary of our Brent outlook for 2025.