Oil markets: Brace for increased volatility in 2025

Benchmark crude prices have kicked off the year with an unexpected boost, fueled by speculation that President-elect Donald Trump will intensify oil sanctions on Iran. This comes alongside President Biden’s increased sanctions on Russian tankers, contributing to higher oil prices at the start of the year. Despite this, the energy forecasting community remains cautious about the future direction of oil prices. A recent Reuters poll indicates that the average projection for West Texas Intermediate (WTI) in 2025 is US$70.86 per barrel, down from $76.10 in 2024. My outlook, though slightly more optimistic due to a strong start to the year, remains below consensus at $62 for WTI and $67 for Brent, marking a $2.00 increase.

A significant and perhaps underpriced risk to crude oil prices is the potential for supply to outstrip demand, especially given OPEC+'s intention to reintroduce barrels to the market. The cartel has already postponed its plan to unwind 2.2 million barrels per day (mb/d) of additional voluntary cuts from October 1, 2024, to April 1, 2025, and it may delay further. Nonetheless, non-OPEC+ supply, primarily from the U.S., Brazil, Canada, and Guyana, is expected to grow by 1.5 mb/d in 2025, according to the latest International Energy Agency (IEA) estimates. Moreover, even if U.S. sanctions curtail Iranian oil production by 1.5 mb/d—a scenario similar to that during Trump’s previous presidency—this amount could easily be compensated by OPEC+, which is currently holding back 5.8 mb/d, or 5.3% of the total global production capacity.

The global oil demand forecast remains cautiously modest. The International Energy Agency (IEA) projects a growth of 1.1 million barrels per day (mb/d), reaching 103.9 mb/d by 2025, up from a more modest increase of 840,000 barrels per day (kb/d) in 2024. Yet, declining Chinese consumption looms large over these projections, casting a shadow of doubt on future demand. Last year, the oil markets were caught off guard when China's growth plummeted to a mere 150 kb/d from a robust 1.4 mb/d the previous year, a stark contrast to the decade's average increase of 600 kb/d. Traditionally a powerhouse, China had been fueling half of the global oil demand's annual growth until this sudden downturn.

Predicting future demand in China is a complex puzzle fraught with rapidly evolving variables. The country's aggressive pivot toward electric vehicles, expansive high-speed rail developments, and growing fleet of LNG-powered trucks are reshaping its energy landscape. These shifts toward greener alternatives are altering energy patterns within China and sending ripples across the global oil markets, making the future of oil demand ever more unpredictable.

In the high-stakes world of oil trading, where market swings can amplify tenfold, I always brace for seismic shifts that can occur without warning. The potential for radical departures from projections is constant when navigating the tempest of global oil demand and supply.

Consider the flashpoints that could dramatically tighten supply and send crude oil prices soaring: First, an escalation in Middle East tensions could choke off regional crude production, creating a ripple effect across global markets. Second, a significant reduction in Russian oil output or exports, triggered by conflict disruptions, could squeeze the global supply, propelling prices to new heights. Third, a strategic about-face by OPEC+ to slash production could catch the market off-guard, further inflaming prices.

The pivot point for demand lies with the Chinese economy. If last year’s unexpected slowdown was just a hiccup and Chinese authorities managed to jumpstart economic growth with targeted stimulus measures, we could see a robust rebound in oil demand. Such a recovery, driven by aggressive economic policies, could dispel bearish outlooks and ignite a bullish fervour in the oil markets.