Oil Slides on OPEC+ Supply Surge, Fading Geopolitical Risk, and Demand Concerns
WTI prompt-month contract ended the week down $3.45 at $63.88/Bbl, unchanged in Friday’s session. Crude has slipped in August after three consecutive monthly gains, pressured by the prospect of a supply glut later this year as OPEC+ continues to unwind production cuts. Signs of slower U.S. economic growth are adding to the weakness, with President Trump’s expanded trade tariffs weighing on activity and posing a risk to energy demand.
Labor market data reinforced the slowdown narrative, with continuing jobless claims rising to their highest level since November 2021. Over the weekend, OPEC+ announced a September quota hike of 547 MBbl/d, completing its full ~2.5 MMBbl/d unwind a year ahead of schedule. The group scheduled an unexpected September 7 meeting, signaling that remaining voluntary cuts of ~1.6 MMBbl/d could be returned, paused, or even reversed. Still, Goldman Sachs expects quotas to hold steady after September.
Trade tensions escalated as Trump doubled tariffs on all Indian imports to 50% in response to the country’s purchases of Russian crude, prompting Indian state refiners to scale back spot Urals buys. Treasury Secretary Scott Bessent indicated China could also face energy-related tariffs. Meanwhile, reports emerged that Washington and Moscow are moving toward a peace agreement that would allow Russia to retain some of its battlefield gains in Ukraine. Such a deal would represent a major de-escalation of one of the most persistent geopolitical flashpoints in recent years, reducing concerns over supply disruptions and further unwinding the war-related risk premium in energy markets.
The improving geopolitical backdrop is eroding the risk premium that had helped support crude earlier this year. Market attention has shifted away from Iranian tensions and Houthi disruptions, while narrowing time spreads point to a loosening physical market. With geopolitical risk fading and OPEC+ steadily adding barrels, the market is increasingly focused on the risk of oversupply later this year. The combination of slowing demand growth and rising production raises the likelihood of a supply glut in the months ahead. AEGIS maintains a neutral outlook on prices with a bias to the downside.
Crude Oil Factors
Geopolitical Risk Premium. (Bullish, Mostly Priced In)Reports emerged that Washington and Moscow are moving toward a peace agreement that would allow Russia to retain some of its battlefield gains in Ukraine. Such a deal would represent a major de-escalation of one of the most persistent geopolitical flashpoints in recent years, reducing concerns over supply disruptions and further unwinding the war-related risk premium in energy markets.
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+ scheduled an unexpected September 7 meeting, signaling that remaining voluntary cuts of ~1.6 MMBbl/d could be returned, paused, or even reversed. Still, Goldman Sachs expects quotas to hold steady after 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) Reports emerged that Washington and Moscow are moving toward a peace agreement that would allow Russia to retain some of its battlefield gains in Ukraine.
Trade War. (Bearish, Mostly Priced In) Trade tensions escalated as Trump doubled tariffs on all Indian imports to 50% in response to the country’s purchases of Russian crude, prompting Indian state refiners to scale back spot Urals buys. Treasury Secretary Scott Bessent indicated China could also face energy-related tariffs.
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) Trump hes threatened secondary sanctions on any countries purchasing barrels from Russia if they do not reach a ceasefire deal with Ukraine in the coming days. He also expressed disapproval of India's large Russian crude purchases, stating that the country could face an unknown penalty for its actions.
Commodity Interest Trading involves risk and, therefore, is not appropriate for all persons; failure to manage commercial risk by engaging in some form of hedging also involves risk. Past performance is not necessarily indicative of future results. There is no guarantee that hedge program objectives will be achieved. Certain information contained in this research may constitute forward-looking terminology, such as “edge,” “advantage,” ‘opportunity,” “believe,” or other variations thereon or comparable terminology. Such statements and opinions are not guarantees of future performance or activities. Neither this trading advisor nor any of its trading principals offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program.