WTI falls as market shifts focus on tariffs and global inventories
The WTI prompt-month contract fell $1.11 to settle at $67.34/Bbl on the week. This week, the market turned its focus to the second round of tariff announcements, inventories, and geopolitics.
President Trump has announced a new slate of tariffs set to take effect on August 1. The plan includes a 30% tariff on Mexico, Canada, and the EU. Several Asian countries are getting hit with a 25% tariff including South Korea and Japan. China, the US’s largest trading partner is noticeably absent after successful trade talks. However, the plan includes a 50% tariff rate on Brazil, our second biggest trading partner.
New tariffs risk a trade war that could negatively impact global demand growth. In their latest IEA July Oil Market Report, the agency projected that world oil consumption will grow by just 700 MBbl/d in 2025, a 20 MBbl/d downward revision from last month’s report. The largest quarterly reductions were to countries potentially affected most by the trade war including China, Japan, Korea, the US and Mexico. On the supply side, the IEA revised its 2025 forecast upward by 240 MBbl/d with global supply now expected to increase by 2.15 MMBbl/d in 2025 to reach 105.1 MMBbl/d.
Analysts at Morgan Stanley say global inventories have increased at a rapid rate in recent months. However, most of the inventory build has occurred in the Asia-Pacific, with only 10% of the build occurring in OECD countries, which has insulated key price hubs. Once summer driving season ends, demand could weaken while supply remains strong. US gasoline demand is already showing signs of weakness, with the four-week average of product supplied falling below 9 MMBBl/d for the first time since early June while stockpiles jumped. As summer demand underwhelms, concerns are growing that consumption will not provide the usual seasonal lift to prices.
Geopolitical risks provided a lift during the week as Israel launched attacks on the Syrian capital of Damascus. Drone attacks in northern Iraq also caused Kurdistan to pause oil operations resulting in 200 MBbl/d of lost production. Also, the EU announced a new sanctions package on Russia for its war in the Ukraine. The sanctions include a lower cap on Russian oil, and restrictions on Russian petroleum refined in third countries.
Despite uncertainty surrounding geopolitical risks and tariffs, volatility remains low with the forward curve signaling tighter conditions in the near term. Analysts Florence Schmit at Robobank says that tightness in the diesel market has been keeping crude prices elevated recently. AEGIS maintains a neutral view with downside bias as softer demand or inventory builds pose a potential risk to crude markets.
Crude Oil Factors
Geopolitical Risk Premium. (Bullish, Priced In) Following Trump's announcement of a ceasefire between Israel and Iran the geopolitical risk premium that cause prices to soar has evaporated. Since then, conflict in the Middle East has continued with Israeli strikes in Syria.
Speculator Positioning (Bearish, Priced In) Speculator's net-length in WTI futures fell, as of the latest CFTC data, with non-commercial traders holding a net-long position of 209k contracts. Positioning has risen steadily since April, when it fell to the lowest level seen in several years.
OPEC Market Share War. (Bearish, Surprise) OPEC raised crude production by 360,000 bpd in June, its largest increase in four months, as Saudi Arabia led a push to reclaim market share despite weakening demand and rising global supplies. The Saudis, along with the UAE and Kuwait, ramped up both production and exports, signaling a strategic shift away from price defense and toward volume gains.
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 July IEA report, OECD inventories have started to move higher. Global inventories are expected to increase throughout the year.
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) OPEC+ is set to hold a meeting on Sunday to discuss production quota increases for the month of August. According to Citigroup, OPEC+ is expected to increase supply quotas by ~400 MBbl/d in August. This would mark the fourth consecutive month of super-sized production hikes. Another large increase would bring the total number of recovered production to nearly 1.8 MMBbl/d.
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) Russia has intensified drone strikes in an effort to pressure Ukraine into accepting its terms for a resolution. Meanwhile, the European Union is proposing a new sanctions package, including a ban on the Nord Stream pipelines and a reduction of the oil price cap to $45/Bbl, to increase pressure on Moscow. While the prospect of a resolution is bearish for crude, additional sanctions could provide offsetting price support.
Trade War. (Bearish, Surprise) Following two days of high-level talks in London, the U.S. and China have agreed on a preliminary framework to implement the Geneva consensus, aimed at restoring the flow of sensitive goods. The deal, pending final approval from Presidents Trump and Xi, includes China’s pledge to expedite rare earth shipments and a U.S. commitment to ease select export controls. Markets reacted positively to the progress, which could help avert a demand-led global recession. However, any breakdown in future negotiations could reverse sentiment and weigh on prices. The Trump administration has reached deals with the UK, China, and Vietnam. The deadline for the tariffs reprieve ends on July 9th.
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) Nuclear talks between the US and Iran are set to restart following the 12 day war between Israel and Iran. Trump has stated that he was willing to support sanctions relief for Iran "if they can be peaceful," so there is a possibility that sanctions relief could be a topic of discussion once the two countries meet again. The U.S. granted Chevron a limited license to maintain its presence in Venezuela, allowing preservation of assets and joint ventures, but prohibiting oil production, exports, or expansion. Any escalation that curtails Iranian or Venezuelan supply could add upward pressure to crude prices.
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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