In Friday’s note, we concluded that the demand side of the oil equation is rather straightforward. The rudimentary view foresees further possible demand destruction due to the seemingly perennial trade wars across the globe, but investors will only adjust their default pessimistic view if deteriorating data warrants it. The supply side has considerably more tentacles.

Even before the fossil-fuel advocate Donald Trump re-surfaced as the President of the United States oil producers had begun to re-assess their views on climate policy and pump money into new exploration and production projects. They argue that the move is necessary to prevent a significant supply deficit as global oil demand grows at a healthy annual rate. And in January, the new President occupied the White House. One of Mr Trump’s campaign pledges was to ensure US energy dominance in the form of increasing reliance on fossil fuel, including oil. At the same time, his propensity to lower oil prices is well-known, which partly rests on the fallacy that the potential inflationary effect of his tax cuts and tariffs will be neutralized by cheap oil.

The broad picture exhibits sufficient supply globally although the range varies. OPEC expects global supply to rise by almost 600,000 bpd less than oil demand in 2025 – hence the need to invest in E&P. The IEA believes that supply will expand by 1.5 mbpd, 500,000 above the demand growth estimate and all of the increase in liquid supply will come from non-DoC producers. The estimate from at Energy Intelligence is more aligned with the IEA than with OPEC as they expect an annual jump of 1.44 mbpd in total liquid growth. Setting aside the outlier projection from OPEC, the general view is that global oil stocks will not decline this year, and they should register at least minimal builds if not more.

This is the current base case scenario, but we are getting accustomed to the reference points being moved frequently. Uncertainties lingering above oil supply outnumber those above consumption. Starting on the other side of the Atlantic, the US President’s goal of increasing US output blatantly contradicts his desire to lower oil prices. Last week Mr Trump sat down with US oil executives where he re-iterated his plan to boost domestic production. Whilst rolling back environmental regulations and hastening permitting process are indeed music to the ear of the oil man, ultimately it is the price that will determine the level of production and the promise to boost output by as much as 3 mbpd falls into the day-dreaming category.

US output will not grow as much as advertised pre-November, but the country will remain a dominant player on the global stage. Risks for supply, however, are lurking from other directions. In his inaugural speech, Mr Trump vowed to be a peacemaker and unifier. Last week, 400 Palestinians died overnight during renewed Israeli attacks on Gaza, which comes with US blessing. Simultaneously the US targeted Houthi rebels in Yemen. Add to that the latest round of Iran-related sanctions on a Chinese refiner and several oil tankers and you will not be surprised by the decent rally observed on Thursday afternoon. Impeding Iranian oil export is one bullish thing, but possible retaliatory measures, such as completely shutting the Suez Canal or the Strait of Hormuz or attacking Saudi oil installations is another quite frightening hypothesis. One can only wonder whether the increase in the Middle East risk premium was the reason for the President to contemplate extending Chevron’s Venezuelan production licence just weeks after it was revoked.

The proposed Ukrainian interim peace deal, a 30-day truce on energy infrastructures has been sold as a success story and a huge stride in the right direction. Success it was, but for the Kremlin. Vladimir Putin has not made an iota of concessions; he sticks with his maximalist demand of ending foreign military support and intelligence sharing with Kyiv. The temporary halt of assaulting energy infrastructures also serves Russian interests much better than Ukraine’s. As much as Mr Trump wants a peace deal, any peace deal at any price, the return of increased Russian oil volume to the international market is not imminent even though US officials are sanguine about the prospects of a long-term peace deal after the weekend’s talks with Ukraine and before today’s negotiations with Russia. In a nutshell, the latest developments from the Middle East and Ukraine insinuate ostensible supply disruptions.

And finally, OPEC+. The gradual lifting of voluntary output constraints is expected to start next week with an initial quantity of 138,000 bpd. Nonetheless, a new plan for disobedient members to compensate for past overproduction was released last week. It foresees collective cuts of 249,000 bpd in April rising to 435,000 bpd by September more than offsetting the planned unwinding of voluntary reduction. Yet, one cannot help but think that given past compliance, the proposed compensation schedule will remain at the level of rhetoric. It suggests rising production. Conversely, those who believe that the group’s production levels are purely price-driven will have serious doubts about the plan of adding oil back to the market.

On the one hand, we have healthy demand growth with downside risk due to economic uncertainty. On the other, supply seems adequate, but the risk of significant disruption and OPEC+ support must not be discounted. As oil prices kept descending since the middle of January, last week’s escalation of tension surrounding Israel and Palestine and the dubious peace hope in Ukraine provided a tempting opportunity to cover short positions. WTI eked out a gain of $1.10/bbl and Brent finished the week $1.58/bbl higher. It, however, won’t be long before macroeconomics and the fragile demand equilibrium will be in the crosshairs of investors. Further strength must not be ruled out, but unless potential supply disruptions meaningfully exceed available and ample spare capacity, breaking above $80/bbl basis Brent in coming months is implausible.

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