AEGIS Factor Matrices: Most important variables affecting oil prices

WTI slides into a weekly loss on Friday’s drop in oil prices

WTI prices dropped 3% on Friday, settling at $70.40/Bbl. The day’s drop of $2.08 marks a .48% weekly loss for oil prices. The downturn in oil prices seems to mirror broader market weakness, as stocks were also hit on the same day, falling nearly 2% due to weaker-than-expected economic data. The overall risk-off sentiment in the financial markets likely affected oil prices, reflecting investor caution across multiple asset classes, rather than any specific event in the commodities market.

As investors assess broader economic concerns, oil traders are closely monitoring OPEC+ production plans which are expected to be delayed once again. This would mark the fourth time the alliance has postponed its strategy to bring back oil production, which was initially set to increase by 120 MBbl/d starting in April. The goal is to restore a total of 2.2 MBbl/d in production, halted back in 2022. Despite pressure from President Trump to lower oil prices, OPEC+ is considering another delay. Soft oil demand growth in China, coupled with the potential impact of President Trump's trade tariffs, has led the group to reconsider. Analysts suggest that OPEC+ is willing to forgo further market share to keep prices from dipping below the $70-$74 range, signaling their intention to prioritize price stability over production growth.

As OPEC+ deliberates on its next move, the market is also grappling with unexpected disruptions on the supply side. Earlier this week, a Ukrainian drone strike targeted the 940-mile Caspian Pipeline Consortium (CPC), which exports oil from Kazakhstan to Russia's Black Sea port of Novorossiysk. The CPC is a critical pipeline for Kazakhstan's oil exports, accounting for about 80% of the country’s total output, transporting 1.5 MBbl/d. On Tuesday, Russian Deputy Prime Minister Alexander Novak said the strike reduced oil flows through the CPC by 30%-40%. A 30% reduction translates to the loss of 380 MBbl/d of oil supply to the market.  With repairs possibly taking months, traders are looking for more clarity regarding the pipeline’s operational status.

This disruption adds further complexity to an already volatile market. AEGIS has adopted a neutral stance on oil prices, which remain near $70, as questions about the impact of Trump’s tariffs on global demand continue to linger. While the likelihood of an OPEC+ production delay is high, the overall supply situation remains clouded by geopolitical risks and policy uncertainties. With uncertainty surrounding both the supply chain and future demand, the market continues to feel the strain of these external factors.

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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