As China’s stockpiling slows, and the demand for oil is curtailed by electric cars, there are potential changes in global supply dynamics.
However, it is expected that short-term risks of supply will provide an additional risk premium.
Analysts at ING Group think that despite the fact that tensions and risks in Iran have eased, they still exist.
Geopolitical volatility and immediate impact
Oil market prices are currently dictated by the developments in Iran. A barrel of Brent crude rose to almost $67 earlier this year, its highest level since early October.
Brent crude oil fell $3 Thursday following recent remarks from US President Donald Trump. This reduced the risk of an immediate American response.
Prices recovered some of these losses on Friday amid the uncertainty over Iran and its supply.
Price drops occurred as a result of the US refraining from taking immediate action against Iran despite domestic protests.
The recent speculation regarding a possible military intervention by Trump’s administration has increased, and this has raised concerns not only for Iranian oil but also wider fears about supply in the Persian Gulf.
Iran Strait of Hormuz: Risks of escalation
Barbara Lambrecht, commodity analyst at Commerzbank AG, said that the situation is still fraught with significant risks of an escalation.
Bloomberg reports that this concern stems not just from the loss of Iranian oil exports. These had reached nearly 1,9 million barrels a day in fall.
If tensions increase, a possible Iranian blockade of Strait of Hormuz is a major worry. This chokepoint controls approximately one-quarter of world seaborne oil supplies.
In a recent report, Warren Patterson, head of commodities at ING Group said that any escalation in the Iran-Iraq conflict could disrupt oil flow through Strait of Hormuz. This is a major chokepoint, where 20m b/d of crude passes.
The market remains nervous due to the fact that, while risks are lessened, they still remain substantial.
When signs of sustained ease appear, the focus will most likely return to Venezuela.
Lambrecht, a Commerzbank analyst, said that oil recently blocked or sanctioned is likely to slowly reenter the global market.
Next week, the International Energy Agency (IEA’s) monthly report will likely refocus our attention on fundamentals of the oil markets.
The escalating crisis in Iran has overshadowed the latest forecasts by the US Energy Information Administration and the Organization of Petroleum Exporting Countries.
Both the EIA (Economic Information Agency) and OPEC (Oil Producers Organization of China) have now provided a preliminary outlook for 2027.
The IEA, however, is likely to take a cautious stance and continue to forecast a large oil oversupply in this year.
Lambrecht stated that the price of oil is determined by the amount of oil flowing into world markets, which becomes apparent in the swelling inventory.
Oversupply and long-term fundamentals
China seems to have drawn significantly down its reserves in order to build up stocks last year.
In contrast, the stock levels of countries in the Organization for Economic Cooperation and Development (OECD) remain within their normal range.
According to Lambrecht, the fundamental outlook of oil prices may be affected by a downward trend if more oil produced is sent towards industrialized countries.
Lambrecht said that this shift may occur if China decreases its efforts to stockpile oil. This is likely to be a result of the increasing adoption of electric vehicles, which will also reduce overall demand for crude.
Patterson, a representative of ING, believes that oil prices will eventually suffer if the rhetoric around Iran continues.
The risk premium is likely to continue to decline the longer the situation continues without US intervention. This will allow more negative fundamentals to prevail.
Despite ING’s negative market forecast, the ICE Brent time spread is still showing strong strength.
Patterson stated that “the spread held relatively well despite the weakness of flat prices yesterday.”
The tightening of the spot market is likely to be due to the decline in oil exports from CPC.
Brent crude was trading at $64.50 per barrel at the time this article was written, up by 1.2% from its previous closing price. West Texas Intermediate crude was also higher at $59.91 a barrel.
Analysts warn that the volatility of oil prices may change as new developments unfold.
