Oil slumps as August 1 trade deadline looms
The WTI prompt-month contract fell $0.87 on Friday to settle at $65.16/Bbl on the week. The market continues to monitor the progression of US trade talks, geopolitical developments, and diesel-refining margins.
As the August 1 deadline approaches, countries have been engaging with the US to reach trade agreements. The US and Japan reached a deal that set the tariff rate at 15% for imported Japanese goods, a reduction from the previous rate of 30%. Negotiators from the US and EU are working towards a deal with President saying the odds of striking a deal are “50-50.” Mexico and Brazil are also seeking to deepen trade ties, reflecting broader efforts to avoid potential fallout from missed deadlines.
Underscoring shifting geopolitical dynamics, the U.S. government has authorized Chevron to resume oil operations in Venezuela. Before losing their license to operate, the supermajor was producing 240 MBbl/d in Venezuela with most of the production going to refineries in the Gulf Coast. It is unclear if fresh Venezuela barrels will arrive in time for peak US driving season which is over in about a month. Refineries typically carry out seasonal maintenance during the fall which leads to decreases in oil demand. As the peak season starts to wind down, key agencies warn of a global supply glut with the IEA expecting total global supply to increase by 2.15 MMBbl/d year on year.
Another key agency, the EIA, reported a 3.2 MMBbl crude draw for the week ended July 18. Diesel inventories rose, but they’re still at the lowest seasonal level since 1996. According to Goldman Sachs, diesel-refining margins are likely to stay above long-run averages. Outages at refineries in Europe, plus disruption (like Chevron’s revocation of their Venezuela license) to high diesel-yield crude grades has exacerbated the situation. Goldman analysts expect diesel-refining margins to stay around $10/Bbl higher in the second half of 2025 and in 2026, when compared with 2015-19 average.
As the trade deadline nears optimism wanes the US will reach agreements with key trade partners. Failure to do so could result in weaker global demand growth at a time when supply is forecasted to grow due to OPEC+ quota unwinds and robust non-OPEC production. AEGIS maintains a neutral view with limited upside.
Crude Oil Factors
Geopolitical Risk Premium. (Bullish, Mostly 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. Diesel inventories rose, but they’re still at the lowest seasonal level since 1996. According to Goldman Sachs, diesel-refining margins are likely to stay above long-run averages.
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. (Bearish, Mostly Priced in) OPEC+ has brought back a significant amount of its voluntarily curtailed production, with about 500 MBbl/d left to bring online. Many expect the group to bring on the remainder of the voluntary cuts in September.
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, Priced In) 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.
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, Mostly Priced In) As the August 1 deadline approaches, countries have been engaging with the US to reach trade agreements. The US and Japan reached a deal that set the tariff rate at 15% for imported Japanese goods, a reduction from the previous rate of 30%. Negotiators from the US and EU are working towards a deal with President saying the odds of striking a deal are “50-50.” Major trade partners, Mexico and Brazil, are also looking to broaden trade ties with the US.
Projected Oversupply. (Bearish, Mostly 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 US government has let Chevron resume oil operations in Venezuela. Before losing their license to operate, the supermajor was producing 240 MBbl/d in Venezuela with most of the production going to refineries in the Gulf Coast.
Russian Supply. (Bullish, Surprise) 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.
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