While bearish sentiment due to OPEC+ production increases and demand concerns are causing oil prices to fall, this decline is likely to be temporary.
“Oil markets are feeling a strong bearish bias after OPEC+ announced the gradual return of barrels from April, while the anticipated supply losses from US President Trump’s sanctions and tariffs are yet to be considered serious given the administration’s flip-flopping,” said Mukesh Sahdev, Rystad Energy’s global head of commodities market.
We project the drop in prices will be temporary and OPEC+ will take corrective measures as the crude time spreads fall below $0.50 per barrel and the market flirts with contango.
Oil prices experienced a decline over the past two days, with Brent crude oil prices briefly falling close to $69 per barrel.
This decrease was triggered by a combination of factors.
OPEC’s decision weighs on crude markets
Primarily, market sentiment was negatively impacted by the US government imposing tariffs on Mexico and Canada.
This news raised concerns about potential trade disruptions and their subsequent impact on global economic growth and oil demand.
Additionally, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, confirmed their decision to increase oil production starting in April.
This announcement further contributed to the downward pressure on oil prices, as an increase in supply is generally expected to lead to lower prices, all else being equal.
“OPEC+ therefore no longer seems willing to give up market share to support the price,” Barbara Lambrecht, commodity analyst at Commerzbank AG, said in a report.
Sources say that internal conflicts have also contributed to the issue, as Kazakhstan significantly exceeded its production target in February, according to Lambrecht.
In the short term, the supply effect is limited.
Tariffs set on ice but crude remain under pressure
The US tariffs that were initially scheduled to be implemented on Canadian and Mexican goods have been temporarily suspended, resulting in a minor recovery in prices.
Goods from Canada and Mexico that comply with the US-Mexico-Canada Agreement will be exempt from the 25% tariffs for a month starting Thursday.
The tariffs had gone into effect on Tuesday.
However, crude oil prices continue to face downward pressure.
Despite the suspension, Canada’s retaliatory tariffs remain in effect, and China is poised to implement its retaliatory tariffs in the upcoming week.
“The market is feeling the weight of a supply overhang, with OPEC+ barrels set to flood an already well-supplied system, keeping a lid on any meaningful price recovery,” Sahdev added.
“Also, the news of higher flows from Kazakhstan and Iraq are influencing markets,” he said.
Supply overhang
Higher production of crude oil by OPEC+, starting April, is likely to face weak demand across the world.
“As a result, the IEA is likely to predict an even larger oversupply in its new monthly report, which will be published next Thursday,” Lambrecht said.
“OPEC+ is banking on demand holding steady but adding more oil at this point risks tipping the market further out of balance and runs the risk of the market flipping into contango,” Sahdev noted.
The International Energy Agency forecasts that crude oil supply from non-OPEC+ countries is likely to increase by 1.5 million barrels a day in 2025.
Source: EIA
This forecast outstrips overall demand growth, which has been pegged at 1.1 million barrels a day by the IEA this year.
Starting in April, eight OPEC countries that voluntarily reduced their daily oil production by a total of 2.2 million barrels since the start of 2024 will gradually increase their daily output.
The increase will be 140,000 barrels per month, and includes a production target increase for the United Arab Emirates.
“This prospect has put considerable pressure on oil prices,” Lambrecht said.
Oil prices may rise
“While the delay in tariffs has provided a brief sigh of relief, the market is still walking a tightrope between policy uncertainty and oversupply concerns,” Sahdev said.
The OPEC+ member states require increased revenue.
However, if supply exceeds demand, prices may decline. Therefore, OPEC+ must maintain a delicate balance to achieve their revenue goals without causing further price drops, according to Rystad Energy.
Traders will be guided by macroeconomic indicators in the coming weeks, with inflation trends, interest rate decisions, and global GDP growth shaping demand.
Sahdev added:
For now, crude remains in a fragile position, and unless demand picks up or production is reined in by OPEC+, prices may struggle to find solid footing.
The price of Brent crude will probably rise again in the latter half of the year, due to the US government tightening sanctions on Iran, according to Commerzbank’s Lambrecht.
Rystad Energy views that the strong bearish sentiment will be short-lived.
It is important to note that while February had the lowest refinery crude demand, refinery run growth could increase by 3 million barrels per day between now and August, according to Rystad.
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