The US President can be accused of many things; inertia is not one of them. The tariff merry-go-round keeps spinning and not even God knows when it will stop. In his latest salvo, he promised to introduce reciprocal tariffs on every country, which disincentivises US imports. He gave his Commerce Secretary until April 1, Fool’s Day, to establish the scale of the retaliatory measures on individual nations. It implies that there is time and room for reactive action from those who are in the crosshairs of the US. Equity investors would like to believe that significant damage will be avoided hence the more than 1% rally in the stock markets yesterday. The brightening of the mood was also the result of the US PPI, which, although topped expectations for January, suggested that the Fed’s preferred measure of inflation, the personal consumption expenditures remains under control.

Rising stocks helped oil recover confidently from the early sell-off, however, the most consequential development in the three years of the Ukrainian war might limit the upside potential. Donald Trump accomplished in three weeks what his predecessor was unable or reluctant to achieve in over 2 years. The 90-minute phone call between the US President and his Russian counterpart to lay down the groundwork for peace talks and ending the conflict is an astonishing step with tangibly ominous repercussions. Ukraine was only informed about the call after it had taken place whilst the EU also faced a fait accompli. The US Defence Secretary poured cold water on Ukraine’s NATO ambitions and labelled its rightful demand to return to the pre-2014 borders as unrealistic. Without security guarantees and reclaiming lands, the peace deal would look more like capitulation. It appears that the US is throwing its former allies under the bus by offering Russia the dream scenario of extending its influence towards Europe, reminiscent of the post-WWII era. The geopolitical consequences of handing Vladimir Putin an unconditional victory just for the sake of being able to boast that a deal, however cynical, has been achieved, will reverberate from the former Soviet republics to the Middle East and Taiwan with all the damaging consequences on rule-based order, economic growth and oil supply security.

Ignoring the Noise

The approach the three main agencies, the EIA, OPEC and the IEA employ in predicting this year’s oil balance has unquestionable merits. It is simply impossible to foresee how the potential trade wars precipitated by reciprocal tariffs will impact supply or demand. So maybe it is best to stick with the prevailing view and only amend forecasts when the aftercasts based on hard data have to be revised. Say, if incoming data implies that last year’s consumption was underestimated, it would be upgraded accordingly and keeping the same assumed growth estimates, this year’s prediction would also be adjusted. This was most certainly not the case this month. Views remained broadly static, particularly on the demand side of the oil equation.

The alignment of opinions on last year’s figures is discernible. Take OECD inventories as the most striking example. A year ago, in February 2024 the range for the end-of-year inventories was well over 200 million bbls. This is a massive gap. Now that the year is behind us and hard data is available the chasm has been reduced to 39 million barrels. To a lesser extent, the same goes for consumption. Last year’s demand was seen at 102.42 mbpd by the EIA 12 months ago. OPEC put it at 104.40 mbpd, a difference of nearly 2 mbpd. In the latest updates, the gap narrowed to 930,000 bpd, less than half of what was observed a year ago.

Inflation, interest rates, the dollar exchange rate and the health of the Chinese economy are still the major talking points when projecting future demand. Import tariffs can drive consumer prices higher, which forces central banks to put rate cuts on hold or, worse yet, increase the cost of borrowing to rein in rising inflation. On the other hand, and particularly in Europe, stagnating economies entail further lowering of rates inevitably sending the dollar higher against a basket of currencies. The Chinese economy continues to disappoint. The IEA believes oil consumption reached its zenith there; its real estate sector is still on life support and stimulating domestic consumption could easily be the only way to re-invigorate growth. The point of the above exercise was to underline that due to the huge amount of unpredictability demand estimates for this year have not been modified meaningfully: the EIA and the IEA increased it by 40,000 bpd and OPEC did not touch it. The deviation in absolute figures, however, remains significant, it is close to 1.2 mbpd.

Uncertainties also linger above the supply side of the oil balance. One can probably count on the OPEC+ alliance keeping production constrained unless oil prices find themselves on a prolonged upward trajectory. Of course, this audacious statement comes with several strings attached to it: will the latest US attempt to broker a Ukrainian peace deal come with a jump in Russian production and exports? Will ‘maximum pressure’ be put on Iran depriving it of petrodollars? Will Donald Trump be successful in pressuring Saudi Arabia and OPEC+ to increase output? There is a simple answer to these questions: we do not know. What was observed after the release of the latest monthly reports is that non-DoC supply was revised upwards by 210,000 bpd by the EIA as output from outside the group increases more than previously anticipated. OPEC and the IEA, on the other hand, marginally cut it.
The call on OPEC+ for this year has been reduced by 170,000 bpd by the EIA, upgraded slightly by the IEA and left untouched by OPEC. It appears that there is a consensus between the EIA and the IEA on the movements in global and OECD stocks after the refreshed estimates. Global oil inventories will INCREASE by just over 400,000 bpd with OECD reservoirs bidding farewell to 2025 at around 2.8 billion bbls. Contradicting the other two, OPEC believes global oil demand will grow faster than non-DoC supply, therefore the higher OPEC+ call will translate into a worldwide stock DRAW of 330,000 bpd with OECD inventories ending the year around 2.7 billion bbls. Past performances are no indication of future results but the 2024 average Brent price of $79.86/bbl insinuates that the market paid more attention to the EIA and the IEA forecasts yesteryear. Those who will stick with them will expect a lower average price for 2025. OPEC followers would bet on a rally, which must get underway soon.

Overnight Pricing