WTI prices fall as OPEC+ set to boost supply and tariff uncertainty looms
WTI prices rose on Friday, settling at $67.01/Bbl. Despite this uptick, crude dropped 4% on the week, marking the seventh consecutive weekly decline. The downward momentum came after the Atlanta Fed’s projected a significant contraction in U.S. economic activity, estimating a 2.8% annualized decline in 1Q GDP, a sharp revision from the previous week's estimate of a 2.3% growth rate. This unexpected forecast has raised alarms about a potential economic slowdown, which in turn has led to a decline in equity markets and fluctuations in commodity prices.
Earlier this week, OPEC+ announced its plan to increase production after several delays. This surprised crude traders when they confirmed plans to proceed with production increases in April. The group announced it would restore a total of 2.2 MMBbl/d of production by 2026, starting with 138 MBbl/d in April. The introduction of new barrels into the market suggests that supply-side factors may not provide the price support that many traders had hoped for.
Adding to the market uncertainty, President Trump’s tariffs went into effect earlier this week. These included 25% tariffs on most goods from Mexico and Canada, a 10% tariff on Canadian energy exports such as oil and gas, and a 10% increase on Chinese imports. The move prompted retaliatory actions from Canada and China, while Mexico’s President Sheinbaum also announced plans for similar measures. However, on Thursday, Trump officials temporarily suspended tariffs on goods compliant with the United States-Mexico-Canada Agreement (USMCA). This exemption, set to last until April 2, 2025, caused a brief uptick in oil prices. The mercurial nature of Trump’s tariff implementation and adjustments have contributed to increased market volatility, particularly with fears that a potential trade war with China could further hinder global demand growth.
The uncertainty surrounding tariffs and the potential for a trade war with China have contributed to this week’s sharp drop in prices. Furthermore, with OPEC+ planning to increase supply, and US sanctions on Iran and Russia having limited impact on global supply, there is little reason to expect a significant price rebound. As a result, AEGIS has adopted a neutral stance on oil prices, forecasting limited upside.
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 reaching a ceasefire agreement earlier in 2025, the amount of geopolitical risk premium in the market will likley come out. Any further escalation of conflict in the Middle East or Europe could lead to an increase in crude prices.
Speculator Positioning (Bearish, Priced In) Managed money or speculator positioning is at the most bearish level since 2023. According to CFTC data, speculators hold a net-long position of about 100k contracts in WTI, down from 250k in January. Speculators are almost always net long on WTI, although at times this position will fall to very low levels, indicating bearish sentiment. This factor could also be looked at as a bullish surprise, given that any bullish catalyst would likely see speculators pile back into the market.
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 remain low, although stocks have risen this year in-line with seasonal trends. Crude data is usually on a several-month lag. According to the February IEA report, OECD inventories were nearly 200 MMBbl below the five-year average as of December. 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 announced recently that it plans to begin restoring production in April. This decision took the market by surprise as OPEC has delayed this plan several times, citing weak market conditions. OPEC's current plan is to bring back about 140 MBbl/d each month until all 2.2 MMBbl/d is restored.
China Demand. (Bearish, Priced In) China's oil demand has been severely affected by a combination of economic weakness and electrification trends within the country. Continued weakness in China's real estate sector has led to slower economic growth. The Chinese government has responded with interest rate cuts and multiple stimulus packages. Electrification trends have also dampened oil demand growth, with the buildout of high-speed rail and LNG-powered trucks and busses impacting diesel demand. China is one of the most prolific adopters of electric vehicles, impacting gasoline demand. Some estimates show demand for transportation fuels in China peaking, but oil demand from China's petrochemical sector should continue for the next few decades.
USD (Bullish, Surprise) The US dollar index surged to multi-year highs toward the end of 2024. The dollar has since erased all post-election gains despite tariff fears being realized. Typically, a stronger dollar will have a negative impact on crude prices, while a weakening dollar will support prices.
Non-OPEC Production. (Bearish, Priced-In) Non-OPEC production remains a bearish risk to the market, as strong output from the US, South America, or Africa could result in more supply coming to the market than expected. Strong non-OPEC growth has been seen over the past few years, driven by the US, Brazil, and Guyana.
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. Recent talks between Trump, Zelensky, and Putin seem to be working toward a ceasefire or resolution to the conflict. While physical oil flows have not been disrupted, a relaxation of sanctions on Russia could initially weaken crude prices.
Fed Policy. (Bearish/Bullish, Surprise) The Federal Reserve is not expected to be as aggressive with cutting interest rates in 2025, given recent stickiness in inflation. The weakness in equity markets has led to the bond market pricing in an additional rate cut in 2025, with a total of three cuts expected. Rate cuts should be supportive of oil prices by fostering economic growth and weakening the US dollar.
Trade War. (Bearish, Surprise) President Trump's tariffs and a possible trade war could weaken economic growth this year, hurting oil demand and prices. While tariffs on Canadian and Mexican energy could be a bullish factor for oil, broader tariffs on other industries stand to hurt economic growth. Tariff fears have led to a 10% decline in equity markets.
Projected Oversupply. (Bearish, Surprise) The IEA continues to anticipate an oversupplied market in 2025, although the level of oversupply has been moderated a bit in its latest outlook. Around the end of 2024, the IEA was anticipating about 1 MMbbl/d of oversupply, which has now fallen to about 0.4 MMBbl/d.
Trump/Iran/Venezuela. (Bullish, Surprise) The Trump administration wants to return to a maximum pressure campaign on Iran in an attempt to limit the country's revenues. Sanctions in 2018 were able to significantly reduce Irans exports. Chevron has been told to begin winding down its Venezuela operations as the US has revoked its permit to operate there. If a large amount of Iranian or Venezuelan oil is removed from the market, it could support oil prices.
Global Refining. (Bearish, Priced in) Refining margins have weakened in Europe and Asia, reducing run rates. This factor can hurt oil prices but is priced in.
Russian Supply. (Bullish, Surprise) Aggressive US sanctions targetting Russia's energy sector were announced earlier this year, leading to fears that a significant volume of oil could be removed from the market. Prior sanctions targeting Russia failed to remove any supply from the market, although Russia's revenues have been negatively impacted.
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