Yesterday’s price action in oil was a stifled affair albeit with a bullish bias. The April 2 implementation of tariffs against Venezuelan oil supply and the further future squeezing of the Iranian oil sector keeps a rally that is now three-weeks old. It remains uncertain as to how tariffs on Canadian and Mexico will play out in the longer-term, but the increased US refinery runs which resulted in draws in inventory complete the current positive picture. Arguably the approaching expiry in the Brent and Asian Crude futures contracts are abetting this bullish cycle. The positive and increased backwardation going into Monday’s rollover has been inspired by trading fund shorts, therefore, when coinciding with the above drivers an overriding scenario of ‘tightness’ is portrayed. Where European and Asian Crude futures open Tuesday morning will be an indication of the hardiness and longevity of this rally if momentum is maintained.

This micro look into our market is all well and good but a macro view cannot escape the epistles from the White House. Those that study chaos theory and the butterfly effect within need not look further than the influence across the globe when Mr Trump flaps his tariff wings. With his grandiose ‘Liberation Day’ approaching, the world and its markets hunker down with ear defenders on. There really is no point in listening to the preamble before April 2, the only choice is to wait until the trade restrictions become fact rather than muse. Even then, it will be a hard sell to convince markets that any decision is not ephemeral and sadly for those that await clarity, ‘Liberation Day’ will probably be yet another notch of threat on the Resolute Desk in the White House to be ignored.

OPEC’s wiggle room is shrinking

Patience is a virtue, particularly in Eastern philosophy but one wonders how long OPEC and OPEC+ will be able to tolerate its program of self-harm as it continues to holster its massive production capability. Next month the group intends to bring back 138kbpd, the reintroduction of which has been delayed for several months in an attempt keep crude prices across the globe supported. Yet, the timing is in fact surprising given the state of the current crude market and many had forecast another push back.

"This gradual increase may be paused or reversed subject to market conditions. This flexibility will allow the group to continue to support oil market stability," an OPEC statement said after this month’s virtual meeting. However, once the cork is out of the bottle, will it be easy to put it back? Even if it is only to formalise the extensive cheating that appears on a regular basis by the same offenders, quota must increase. The United Arab Emirates has long yearned for a higher revision in its own limit of production because of its increased production capacity but has of late joined the ignominies of Russia, Iraq and Kazakhstan in operating outside of agreed quota. OPEC+ appears to be addressing the UAE problem by increasing its allotment gradually by 300kbpd between April 2025 and September 2026. Retrospectively policing quota can only be enablement, and it will arguably not be long before the other mentioned villains seek such certification for themselves even if their own capacities do not justify it.
OPEC has held out for a demand recovery where worries around quota adherence would be far away but at present such longed-for appetites remain cloistered. There has been something of realignment between the IEA and OPEC on world demand with the former predicting 1.1mbpd of growth and the latter 1.4mbpd for 2025. However, stepping back and looking at where demand and supply converge in 2025, they are loosely not far away in agreement for EIA and IEA numbers. The US and European agencies see global demand around 104mbpd with a production overrun of 0.04mbpd and 0.60mpbd respectively. OPEC as always takes a more optimistic view with demand at 105.15mbpd and an underrun of 0.58mbpd. While ‘balanced’ is a get out clause for anything in life, there does seem to be something of an equilibrium. The trouble is, there is a lot more in the tank from production as witnessed by the close to 5mbpd spare capacity boasted by OPEC members. There is also a US President who is actively stomping the boards of the international stage whipping up oil producing nations to turn on the spigots in his plans to combat inflation and shortfalls from Venezuela and Iran.

The very same President is the same person who will likely cause damage to demand with his blustering advocacy of tariffs. Given such threats and no demand recovery in sight, OPEC’s program of policing oil prices by supply is illogical. Yes, fortune comes from others woe, as in a hole to fill if Venezuelan and Iranian crude disappears from the oceans of the world, but those envisaged new sources of customers are not without competition. At the turn of the year Bloomberg calculated supply from US, Brazil, Canada, Guyana and others would increase annually by over 35%. Bank of America, among others, estimated non-OPEC countries will account for around 70% of market share in the first quarter of 2025.

Cuts in OPEC+ production, be they formal or add on voluntaries, have been in place since the middle of 2023 but they have only worked as a brake to excessive falling prices rather than a panacea. During times of strife, as in the start of the Gaza war, OPEC cuts were an accelerative to the bullish driver, they have never in isolation been able to sustain a rally. The Brent M1 futures high in September 2023 was $97.69/barrel, even during the missile exchanges between Israel and Iran last year such heights have never been threatened again. Hoping for higher prices to appease the demanding exchequers of OPEC+ members is no longer a viable strategy. Demand is questionable and competition is increasing. Making more oil available to the market will of course bring prices lower. However, low prices will have a decent double effect. Firstly, they will create demand and secondly, pull another brake lever on energy transition which are both conducive to the producer group’s long-term interest. The cartel will not split, but unless it addresses its current policy, take risk and competes properly in an open market, not only will other members break quota but the group’s demise in relevance will continue.

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