OIL PRICES
Crude oil has long been a key resource, fueling the world and continuing to play a major role in electricity generation. Despite the rise of alternative energy, it remains the most widely used. Its significance makes it one of the most actively traded commodities, as industries and economies still depend on it. But what influence does oil cartel OPEC have amid fears of a wider trade war?
- OIL: SUPPLY AND DEMAND
The largest oil suppliers in the world include the United States, Saudi Arabia and Russia. In recent years, the US has extended its lead as the primary oil producer by expanding fracking, producing both oil and shale gas. Russia and Saudi Arabia are major oil producers and players in the Organisation of Petroleum Producing Countries (OPEC / OPEC+), a cartel that jointly agrees how much oil its members will produce. President Trump outlined that the US needs to produce even more oil via his “drill baby drill” policy.
Demand, or oil consumption, is as important as supply. The US consumes 20 million barrels per day (bpd), China consumes 16 million bpd and India 5.5 million, with demand rising quickly as its economy grows. It’s important to understand who the major players are before looking at the dynamics.
- MARKET DYNAMICS
Crude oil prices are primarily influenced by perceptions or flows of supply and demand. An oversupply coupled with falling demand could lead to price declines, while rising demand against reduced supply could push prices higher. As an example, signs of strong demand could spur oil prices upwards, but reports indicating weak demand from major consumers like China contribute to downward pressure on prices.
- MAJOR PRICE DRIVERS
Production levels: The balance between crude oil production and consumption is a key price driver influencing prices. Reports on U.S. domestic production and weekly inventory data may significantly impact market perceptions.
OPEC: Plays a major role in managing the global oil supply. By setting production targets for its member countries, OPEC could influence prices. Saudi Arabia, OPEC's largest producer, could have the most influence over global oil markets, especially when it adjusts its output levels.
Geopolitical events: Political instability in oil-producing regions could lead to supply disruptions that affect global oil prices. Conflicts in the Middle East, or sanctions on oil-producing countries like Iran, Venezuela, or Russia, create uncertainty, leading to volatility as traders react to potential shortages.
- OIL PRICES: TRADE WAR FEARS
The trade war is having a major (negative) impact on oil prices. Tariffs make goods more expensive. Industry responds by not producing as much, people become more cautious and spend less on holidays etc., and oil demand could fall. A worst case scenario could see a damaging recession sending oil prices lower. However, if trade conflicts are short-term or tariffs are modest, the impact could be limited. And the US signing trade deals is seen as positive. For now, the markets don’t know which scenario will play out, and this caution is causing oil prices to remain low.
- OPEC: INFLUENCE ON OIL PRICE DIMINISHED?
OPEC countries make up some 40% of global supply. In most circumstances this means the cartel could have a significant impact on oil prices. However, reports suggest that OPEC’s current position, amid the trade war, is not to try to prop oil’s price up, rather it may take action if oil’s price were to reach $50. Despite oil trading around $60, OPEC+ is actually unwinding its production cuts and at its meeting on May 31st is expected to hike output by 411,000 bpd from July.
- US IRAN NUCLEAR TALKS
Geopolitics in the oil rich Middle East have a major impact on oil prices. Historically, price shocks have been caused by conflict or war which have disrupted or even destroyed oil production in the region. The US and Iran are currently involved in negotiations with the US urging Iran to abandon its nuclear weapons program. The US has tightened oil sanctions on Iran. However, ongoing talks have shown few results. The US said it could attack Iran if no deal is agreed. Israel is reportedly prepared to strike Iranian nuclear facilities, even without US permission. Iran has threatened to close the Strait of Hormuz (a key transit route). This could be an oil price spike due to constrained global supply.
Conclusion –
Oil prices in 2025 have been impacted by trade war fears, geopolitical uncertainty and OPEC output decisions. But the outlook remains uncertain, with much depending on the length and depth of the trade war, while supply shocks may impact oil’s price. Demand remains the major focus of market makers.