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Oil Brief
03.02.2025Oil prices fell in 2024, weighed down by concerns over the robustness of global oil demand growth amid weak economic activity in China especially and burgeoning non-OPEC+ supply led by output gains in the Americas. Prices were rangebound in Q4, with the impact of geopolitical catalysts largely neutered by ample OPEC+ spare production capacity due to the group’s production cuts. The IEA expects oil demand growth to accelerate slightly in 2025 to just over 1 mb/d as sentiment has turned a little more positive about the macroeconomic landscape, though these small demand gains are unlikely to offset gains on the supply side. The supply overhang has been partly mitigated by OPEC+’s decision to delay and slow down the pace of supply cut unwinding but, at 0.7 mb/d (IEA), is still expected to lead to inventory builds and downward pressure on prices. That said, new US sanctions on Russia, which lifted oil prices in January, and the prospect of further sanctions on Iran as the Trump Administration has indicated, could provide some upside risk to the oil outlook.
Markets
OPEC output hike delay drives prices higher; US sanctions on Russian energy bolster price rally
Oil prices rose in Q4 2024, lifted by OPEC+’s decision to both delay and slow the pace of unwinding of members’ voluntary production cuts, which helped to partly mitigate concerns of an oversupplied market in 2025. International benchmark Brent crude closed up 4% q/q in December to $74.6/bbl. (Chart 1.) Brent briefly traded above $80/bbl as heightened tensions between Iran and Israel spilled over into direct but limited military strikes. Local crude marker Kuwait Export Crude (KEC) gained 2% q/q to close at $75.8/bbl.
2024 was the second consecutive year that oil prices declined, with Brent shedding 3.1% and KEC dropping 4.8% over oil demand growth worries, especially amid weak economic activity and shifting oil consumption patterns in China. 2024 also witnessed a significant decline in oil price volatility, with Brent trading in a narrow $22/bbl range during the year. This reflected the absence of major catalysts and the weaker pass-through onto oil prices of supply-disrupting geopolitical developments, the impact of which has been mitigated by ample global spare production capacity due to OPEC+ supply cuts.
Brent futures continued to rise in the new year, surging past $80/bbl after the US introduced more wide-ranging sanctions on the Russian oil and gas sector, targeting producers, tankers, intermediaries, traders, and ports. The surprise announcement led to some Chinese ports banning sanctioned Russian vessels, leaving buyers of Russian crude in Asia scrambling to find alternatives. Moreover, fears of more strictly enforced sanctions on Iran by the Trump administration has stoked supply worries in 2025. Lastly, a cold snap in North America and Europe raised demand for heating oil, supporting prices.
Hedge funds added to bullish bets in Q4
After turning net bearish on Brent for the first time on record in September amid oversupply concerns, money market positioning shifted back into net bullish territory as the year drew to a close. International Commodities Exchange (ICE) figures showed that in the week ending 14 January 2025, speculative net length – the difference between the volume of ‘long’ contract (bets on prices rising) and the volume of ‘short’ contracts (bets on prices falling) – reached its highest since May 2024 (226,859 lots). (Chart 2). Meanwhile, trading activity, measured by open interest, or the number of outstanding futures and options contracts, fell to 3 million contracts in January, from a 2024 peak of 3.3 million contracts last October amid heightened geopolitical risk in the Middle East.
Demand
Global oil demand growth in 2024 undershot expectations; outlook improves on economic activity
Oil demand growth estimates for Q4 2024 proved stronger than initially expected, with consumption boosted by lower fuel prices and a cold snap that hit economies in the Northern Hemisphere. The International Energy Agency (IEA) pegs annual oil demand growth in Q4 at 1.5 mb/d, raising the overall 2024 estimate to 0.94 mb/d from 0.85 mb/d. (Chart 3.) OPEC, on the other hand, appears to have settled on a demand growth figure of 1.5 mb/d for 2024, according to its January 2025 oil market report, having revised down its forecasts by a whopping 750 kb/d over six consecutive months. Less than stellar oil consumption in China caught OPEC and many others by surprise. Indeed, the most recent official figures show that China’s crude oil imports fell by 1.9% in 2024, the first non-pandemic-related annual decline in two decades. (Chart 4). Transportation fuel use was especially hit amid increasing electric vehicle penetration and substitution of oil for LNG in heavy duty road vehicles.
For next year, the IEA sees oil demand growth increasing slightly by 1.05 mb/d amid an improved macroeconomic outlook. This is in line with the International Monetary Fund’s (IMF) recent January 2025 update, which sees growth this year at an upwardly revised 3.3%. OPEC, for its part, sees oil demand growing by 1.45 mb/d this year, a forecast that once again puts it at the more bullish end of estimates. Both agencies agree that non-OECD economies will be the main driver of oil demand growth this year, with OPEC seeing a rise in transportation fuels in China, India and Asia more broadly. This trend is set to continue into next year, according to OPEC. In a first look at 2026, the producer bloc forecasts a similarly robust rate of growth for global oil demand (+1.4 mb/d y/y) with non-OECD countries accounting for 1.3 mb/d.
Supply
OPEC+ extends voluntary cuts to end-March 2025 and plans to restore output at a slower pace
Faced with the prospect of looser market fundamentals, OPEC+ decided in December 2024 to extend the 2.2 mb/d of “Group of Eight” voluntary cuts by three months to end-March 2025. Furthermore, supply will also be restored to the market at a slower pace than originally planned, at 135 kb/d rather than 180 kb/d, thereby extending the tapering process phase by six-months to September 2026. The UAE’s 300 kb/d baseline increase, initially scheduled to start in January 2025 over a nine-month period, will now also be pushed back to April and implemented over an 18-month period instead. According to OPEC secondary sources, Declaration of Cooperation (DoC) crude production (OPEC+) fell by 15 kb/d m/m in December to 40.7 mb/d. (Chart 5). Leading the gains was Libya where output rose 52 kb/d m/m to 1.29 mb/d, the highest since May 2013, as the government looked to restore and boost production capacity to 1.6 mb/d. Offsetting the gains were declines in the UAE (-44 kb/d), Kazakhstan (-35 kb/d), Saudi Arabia (-24 kb/d), and Iraq (-23 kb/d). Kazakhstan has made more headway in complying with its quota than Iraq, with the former’s output only 6 kb/d above quota while the latter is still exceeding its level by 129 kb/d.
In the US, crude production rose to a record 13.57 mb/d by end-December, according to weekly data published by the Energy Information Administration (EIA). (Chart 6). The EIA estimates output gains in 2025 to be modest, with crude production rising 340 kb/d to 13.62 mb/d (year average), factoring in limited impact of Trump’s “drill, baby, drill” policies. Meanwhile, the outlook for non-DoC supply remains significantly more robust, with the IEA projecting a 1.5 mb/d increase in 2025, which would comfortably outpace estimated demand growth regardless of OPEC policy and lead to a supply surplus and inventory builds. OPEC’s estimates reveal a similarly strong non-DoC supply growth outlook for both 2025 and 2026 at 1.2 mb/d, led by higher output in the Americas.
Following the latest round of US sanctions on the Russian energy sector and in view of the prospect of additional or stricter enforcement of current sanctions on Iranian oil supplies, the market could tighten and provide OPEC+ with a window to maintain or accelerate its current supply cut tapering plans. The IEA estimates that around 1.6 mb/d of Russian seaborne exports could be at risk from the recent US sanctions, enough to offset the supply surplus expected this year. Were Russian flows to be severely curtailed, we think the most likely scenario is that OPEC+ will still proceed with the existing resupply plans, given that group-wide approval has already been secured and that it would be less politically contentious vis-à-vis Russia, whose buy-in and support OPEC+ depends on for cohesion and efficacy. The optics of raising group-wide output at Russia’s expense would not be good—and Russia would almost certainly vote against it.
Market Balance and Price Outlook
Risks to the downside, but supply disruptions and stronger economic growth could mitigate overhang
Amid softish oil demand growth and higher oil supplies both from OPEC+ and non-OPEC+ producers, oil market balances are expected to materially loosen this year, flipping from the 0.6 mb/d deficit seen in 2024 to a surplus of 0.72 mb/d in 2025, according to the IEA. (Charts 7 & 8.) While OPEC+’s decision in December to delay and slow down the pace of output hikes has helped to halve this supply overhang, achieving a balanced market would probably require supply-side disruptions, such as the aforementioned sanctions or other geopolitical or natural phenomena, and/or stronger oil demand. On the latter, a clear upside risk could present if China’s economy outperforms expectations, through more effective economic stimulus for instance. Based on an assessment of the current market dynamics, we see Brent averaging $70/bbl in 2025, down from 2024’s average of $80.
