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Last Look - Oil prices rise, but post weekly loss on tariffs and OPEC+ production plans
Oil finishes lower for a second week while tariffs are set to take effect on February 1
The March WTI contract settled lower by more than $1 to 72.53/Bbl, marking the second consecutive lower weekly settlement. Oil has given up most of this month's gains after prices briefly reached $80/Bbl. The market remains focused on the prospect of tariffs, which are set to take effect on February 1. Meanwhile, Goldman Sachs raised its Brent crude price target for 2025 and 2026.
On Friday, the Trump administration announced it would impose tariffs on Canada and Mexico while being vague about whether any products, such as oil, would be exempted. The administration is likely hoping to strike a deal very quickly and is intentionally not commenting on exemptions. If oil is included in the tariffs, there could be wide-reaching impacts on crude prices. Canadian oil differentials would widen, potentially leading to reduced flows into the US if Canadian producers decide to curtail production. Midwestern US refineries receive most of their feedstock from Canada, which could reduce Midwest refinery output and raise product prices within the US. Canadian and Mexican oil is also delivered to the US Gulf Coast, where it is refined or re-exported. Uncertainty remains high around what the tariffs will involve, how long they may be in place, or how market participants will react to them, but at face value, they appear to be a near-term bullish factor for WTI.
In other news, Goldman Sachs raised its price forecast for Brent crude in 2025 and 2026, citing sanctions on Russia and tariffs. The bank increased its 2025 price target to $78/Bbl from $76/Bbl and its 2026 forecast to $73/Bbl from $71/Bbl. However, Goldman did note that prices could temporarily rise to $93/Bbl if sanctions reduce Russian supply by 1 MMBbl/d or more. The bank also flagged the risk of tariffs on Canadian oil saying, “Canadian oil tariffs would risk unpopular, if temporary, gasoline price increases in the US Midwest.”
Crude Oil Factors
Geopolitical Risk Premium. (Bullish, Surprise) Conflict in the Middle East helped offset much of the bearish demand story in 2024. Although no crude flows were disrupted, fears of a wider conflict supported oil prices. With Israel and Hamas having reached a ceasefire agreement earlier in 2025, the amount of geopolitical risk premium in the market will likley come out.
Trade Flows. (Bearish, Priced In) Traders are stepping back out of speculative positions amid potential weakness in demand, forecast for an oversupply in 2025, and broader equities sell-off is exerting downward pressure on oil prices. Oil prices tracked equity markets since March 2023 as renewed worries over the U.S. and European banking sectors subsided. AEGIS also notes that the recent movement in prices could be driven by the price trend (technical selling or buying) itself rather than the fundamentals. We see that trade flows have been affecting price action in commodity markets in recent months, as recent movements in the crude market have partially been attributed to algorithmic selling.
OPEC Market Share War. (Bearish, Surprise) The possibility exists, albeit a small one, that should OPEC's efforts to bolster oil prices through production cuts prove unsuccessful, the cartel could potentially flood the market with additional barrels as a strategy to reset. OPEC has pushed its plan to unwind existing 2.2 MMBbl/d production cuts by two months. Now, starting in December, the unwind is set to gradually bring 180 MBbl/d of oil back into the market every month.
Oil/Product Inventories. (Bullish, Priced In) Crude inventories in the US sit at the lowest level since January while stocks at Cushing are at their lowest since November. Meanwhile, refined product inventories in both the U.S. and abroad are low. Crude data is usually on a several-month lag. According to the January IEA report, OECD inventories were nearly 200 MMBbl below the five-year average as of November. The oil market has likely remained in a slight supply deficit since then, so inventories could be lower now, as evidenced by the backwardation in the forward curve.
OPEC+ Quotas. (Bullish, Priced In) On June 2, OPEC+ announced its extension of 3.66 MMBbl/d cuts through December 2025. Additionally, the 2.2 MMBbl/d voluntary cuts from eight member countries will continue into Q3 2024 but will start to be reversed in October at a rate of 0.18 MMBbl/d per month. OPEC+ members agreed on September 5 to delay a planned gradual 2.2 MMBbl/d supply hike by two months, shifting the start to December. The group will add 0.19 MMBbl/d in December and 0.21 MMBbl/d from January onwards, with an option to adjust or pause these hikes depending on market conditions. The cartel also reaffirmed its compensation cuts of 0.2 MMBbl/d per month through November 2025, as members such as Iraq, Russia, and Kazakhstan have struggled to meet their original production quotas.
AEGIS notes that the global crude market would quickly build inventories without OPEC's support in reducing supply.
OPEC Unwind/Compliance. (Bearish, Surprise) The new voluntary OPEC+ production cuts put member nations' adherence to quotas under scrutiny. Any deviation, such as halting, reversing, or exceeding their quotas, could end up being one of the surprise bearish factors weighing on the market. OPEC has delayed the unwind of its 2.2 MMBbl/d voluntary production cut for a second time to January despite its forecast of nearly 2 MMBbl/d demand growth in 2025. This cautious approach reflects weak demand, particularly from China, and rising non-OPEC supply, which keeps downward pressure on prices. Typically, OPEC+’s output cuts act as a price floor, but with up to 6 MMBbl/d in spare capacity, the group can act as a cap for prices as well, likely to adopt a month-to-month strategy that could test group cohesion over time.
China Demand. (Bearish, Priced In) China's oil demand has been severely affected in 2022 by strict COVID-19 control measures. Reduced mobility has hindered economic activity and, therefore, consumption. China eased its Covid restrictions in early December 2022 and announced a slew of economic measures to boost its economy. As the country completely emerged from the lockdowns, its oil demand was expected to rise, putting extra strain on a market that has already tightened dramatically since Russia invaded Ukraine. However, the pace of Chinese demand growth has been slow compared to what the market had expected. Absolute Chinese oil consumption is expected to hit a record high this year. According to the IEA, Chinese demand rose by 1.7 MMBbl/d in 2023 and is expected to increase by just 0.18 MMBbl/d in 2024. China underpins the deceleration in growth, accounting for around 20% of global gains both this year and next year, compared to almost 70% in 2023. China’s demand is important as it is nearly half of the global demand growth in 2024. However, China's apparent oil demand fell 6.98% Y-o-Y in September to 14.18 MMBbl/d, driven by weakness in fuel demand.
USD/Fed (Bullish, Surprise) The US dollar index had a sixth consecutive weekly gain, climbing above the 200-day SMA, supported by a 25 bps Fed rate cut and renewed investor confidence tied to potential Trump policies. Trump’s proposed tariffs on China and Europe are expected to stoke inflation, while Republican-led tax cuts might offset growth impacts, though potentially widening the budget deficit. Fed Chair Jerome Powell indicated that while inflation remains a concern, further rate cuts could slow if inflation rises, with future moves contingent on labor market shifts. Economic resilience and US outperformance versus G10 peers underpin the Dollar's robust outlook.
Non-OPEC Production. (Bearish, Priced-In) Many prominent research groups (EIA, IEA, OPEC) think non-OPEC production, dominated by the U.S., will increase in 2023. If these forecasts come to fruition, it would have a slightly bearish impact on oil prices if the market were otherwise well-supplied. IEA forecasts the 2024 and 2025 non-OPEC production to increase by 1.5 MMBbl/d.
Ukraine-Russia Resolution. (Bearish, Surprise) A potential resolution to the Ukraine-Russia war could see some of the risk premium come out of the market. A leaked memo detailed a potential plan to resolve the conflict led by the US.
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