June, 5 2025
In the latest EnergyScan podcast, we take a look at the oil market. The trade war has driven prices down by around $10/b. OPEC’s policy could push prices down further, but geopolitical tensions with Iran are currently preventing this.
The global oil market presents a complex picture of competing forces that have kept Brent crude prices relatively stable around $65 per barrel despite significant underlying tensions. While surface-level price movements may appear muted, powerful countervailing forces are shaping market dynamics, from escalating trade disputes to strategic shifts in OPEC+ production policy and mounting geopolitical risks across key producing regions.
The ongoing trade conflict initiated by the United States has emerged as a primary driver of oil market sentiment, creating substantial uncertainty about global economic growth prospects. Since major tariff announcements on April 2nd, Brent crude prices have declined by approximately $10 per barrel, reflecting market concerns about weakening demand fundamentals.
The joint US-China decision on May 12th to reduce bilateral trade tariffs provided temporary market stability, helping to anchor Brent prices near current levels. However, negotiations remain ongoing with uncertain outcomes, leaving market participants cautious about future demand growth.
The trade dispute’s impact extends beyond immediate price effects, triggering widespread revisions to global growth forecasts. Consumer price increases in the United States and reduced business investment appetite internationally have created a negative feedback loop affecting energy demand projections.
We note that even a “manageable” outcome involving standard 10% tariffs on US imports would still represent a significant drag on economic activity. This uncertainty has contributed to the cautious positioning observed across energy markets, with participants awaiting clearer signals about the ultimate scope and duration of trade restrictions.
OPEC+, comprising the 12 OPEC member countries plus key allies including Russia and Kazakhstan, has dramatically accelerated its production increase timeline in a surprising strategic shift. The organization initially planned to reverse 2024 production cuts gradually, targeting increases of 2.2 million barrels per day (mb/d) over 18 months through September 2026, plus an additional 300 000 barrels per day (kb/d) for the United Arab Emirates.
However, beginning in May, OPEC+ decided to triple the planned production increases for consecutive months. At the current pace, production cuts could be completely eliminated by September or October 2025, representing a 12-month acceleration from the original timeline.
OPEC’s decision partly reflects its traditionally optimistic demand forecasting approach, which has recently gained credibility following the International Energy Agency’s upward revision of 2024 demand estimates. This revision implicitly supports OPEC’s more bullish projections for 2025 and 2026, providing fundamental justification for increased production capacity.
The organization’s strategy acknowledges that much depends on trade negotiation outcomes, particularly between the United States and China, while maintaining that demand growth will ultimately support higher production levels.
Saudi Arabia’s production strategy reflects complex geopolitical considerations, particularly regarding US President Donald Trump’s explicit requests for lower oil prices. During Trump’s recent visit to Saudi Arabia, discussions centered on the Kingdom’s willingness to meet American demands for reduced energy costs through increased production.
This creates an interesting dynamic, as Trump simultaneously advocates for higher US domestic production, which requires oil prices of at least $75 per barrel according to recent Dallas Federal Reserve surveys. This contradiction allows Saudi Arabia to officially satisfy presidential demands while potentially weakening US unconventional oil producers who have captured significant market share in recent years.
Saudi Arabia’s approach also addresses persistent discipline issues within OPEC+. The Kingdom has faced resistance from the United Arab Emirates, which sought higher production levels to justify recent investments. Additionally, systematic quota violations by Iraq and Kazakhstan have undermined collective production management efforts.
In response, Saudi Arabia has shifted toward a market share strategy, demonstrating willingness to risk price declines to reassert dominance within OPEC+. The Kingdom’s significantly lower production costs compared to other members, including Kazakhstan, provide a strategic advantage in any potential price competition.
Historical analysis reveals that Saudi Arabia has previously engineered significant price declines to achieve strategic objectives. In 2014, the Kingdom battled emerging American shale oil production, driving prices below $50 per barrel before a second wave pushed them even lower. The 2020 price war with Russia, exacerbated by the COVID-19 crisis, saw prices collapse to $15 per barrel.
Despite Saudi Arabia’s high budgetary break-even point of over $90 per barrel according to IMF estimates, this threshold was similarly elevated during previous price wars. The Kingdom’s substantial financial reserves and low production costs provide flexibility to sustain periods of reduced revenue.
We identify several conditions that could trigger significant price declines: continued OPEC+ production increases, sudden deterioration in demand outlook, and absence of geopolitical escalation. Under such circumstances, prices falling below $60 per barrel appear entirely possible, having already occurred twice briefly in 2025.
The combination of these factors would likely overwhelm current price support mechanisms, potentially leading to a sustained period of lower oil prices reminiscent of previous market cycles.
Geopolitical tensions across three key regions help explain Brent crude’s stabilization around $65 per barrel despite fundamental pressures. These risk factors create a complex web of supply concerns that offset bearish demand and production trends.
The US administration has significantly restricted foreign company authorizations to exploit Venezuelan oil fields while threatening commercial reprisals against countries purchasing Venezuelan oil. However, production and export levels have not yet shown significant declines, suggesting limited immediate impact on global supply balances.
The situation remains fluid, with potential for either escalation or resolution depending on broader US-Venezuela diplomatic developments and regional political dynamics.
New international sanctions targeting Russia reflect its unwillingness to negotiate meaningful peace agreements with Ukraine. However, historical evidence suggests limited effectiveness of oil-specific sanctions against Russia, as exports have successfully been redirected toward China and India.
This redirection pattern indicates that Russian oil continues reaching global markets despite Western sanctions, limiting the supply impact while potentially affecting regional price differentials and logistics costs.
The most significant geopolitical risk centers on Iran, where multiple factors are converging to create potential for market disruption. Current US sanctions target buyers of Iranian oil in China but with limited enforcement effectiveness, suggesting ongoing negotiations regarding Iran’s nuclear program.
However, a recent International Energy Agency report reveals that Iran has accelerated uranium enrichment to levels potentially enabling nuclear weapon development in the near future. Israeli pressure on the United States for military action against Iranian nuclear facilities creates the possibility of conflict that could block the Strait of Hormuz, through which 20% of global oil production transits.
Such a scenario would represent a worst-case outcome for oil markets, potentially triggering supply shortages and price spikes that would overwhelm current market dynamics.
The oil market currently balances multiple competing influences that could drive prices in either direction. Bearish factors include trade war impacts on demand growth, accelerated OPEC+ production increases, and potential market share competition among major producers.
Bullish risks center primarily on geopolitical developments, particularly regarding Iran, while demand forecasts remain sensitive to trade negotiation outcomes and broader economic growth trends.
Key developments requiring close attention include trade negotiation progress between the United States and China, OPEC+ production quota compliance and future meeting decisions, and escalation risks in the Middle East, particularly regarding Iran’s nuclear program.
Weather patterns affecting driving seasons and refinery maintenance schedules will also influence short-term price movements, while longer-term trends in renewable energy adoption and electric vehicle penetration continue shaping demand growth assumptions.
Despite current price stability, underlying market tensions suggest continued volatility potential. Traders should prepare for rapid price movements in either direction depending on resolution of key uncertainties affecting supply and demand balances.
The range of potential outcomes remains unusually wide, from significant price declines below $60 per barrel to sharp increases above $80 per barrel, depending on geopolitical developments and economic policy outcomes.
Strategic positioning considerations
Market participants may benefit from maintaining flexible positioning that can adapt to rapidly changing fundamentals. The current environment rewards tactical approaches over strategic long-term bets, given the high degree of uncertainty across multiple market drivers.
Risk management becomes particularly important given the potential for supply shocks from geopolitical events or demand surprises from trade policy changes.
The global oil market remains poised at a critical juncture where multiple powerful forces create both significant risks and opportunities. While Brent crude prices appear stable around $65 per barrel, this stability masks underlying tensions that could drive substantial price movements in either direction.
Trade war impacts have already reduced prices by approximately $10 per barrel, while OPEC+ production increases threaten further downside pressure. However, geopolitical risks, particularly regarding Iran, provide meaningful upside potential that could overwhelm bearish fundamentals.
Market participants must navigate this complex environment by closely monitoring trade negotiations, OPEC+ policy decisions, and Middle Eastern geopolitical developments. The convergence of these factors will ultimately determine whether current price stability persists or gives way to more significant directional moves.
Success in this environment requires maintaining awareness of the multiple scenarios that could unfold while positioning for the most probable outcomes while hedging against tail risks that could dramatically reshape market dynamics.
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