Risk Premium, Driving Season & Tariff Inertia
The current state of the oil market resembles Samuel Beckett’s cult play Waiting for Godot. In the tragicomedy, the main character never arrives. In the oil market, the consensus, namely a supply surplus, is still expected to befall us in the coming months, albeit later than anticipated two months ago. For now, however, forward guidance is being ignored; immediate concerns remain the main driving forces, and they are deemed more salient.
There has been a tangible, and possibly temporary, rise in the risk premium over the past two days, as Houthi rebels renewed their assaults on commercial shipping in the Red Sea. In the latest atrocity, a drone and speedboat attack on a Greek bulk carrier killed four people.
Although the CME Heating Oil and ICE Gasoil contracts retreated yesterday, middle distillate stocks remain tight. The latest weekly EIA report put inventories below 103 million barrels, a 20-year low, representing a 17% annual deficit and a 14% shortfall compared to the long-term seasonal norm. Further encouragement came from gasoline; after all, the summer driving season is in full swing. Inventories of the motor fuel plunged by 2.7 million barrels, with weekly implied demand at 9.2 mbpd. Settlements would plausibly have been higher were it not for a sizeable 7 million barrels increase in US domestic crude oil inventories.
Then there is the seemingly unsolvable jigsaw puzzle, aka the US trade policy. The pieces are constantly being moved around by the US President in an ad hoc manner, and it remains unclear what the final picture will look like. Investors appear to be betting on a muted effect, perhaps hoping that Donald Trump will back down and common sense will ultimately prevail. Such a reversal, however, is far from certain. Once the inventories pre-emptively stocked in the first quarter start to dwindle, the inflationary consequences of this recalcitrant stance toward trading partners are likely to surface. Even the Federal Reserve acknowledged as much: monetary policymakers, according to the June minutes, fear persistent inflation precipitated by import duties.
Higher Brent Price, Looser Oil Balance
Although this year’s oil price forecast was upgraded by $3/bbl by the EIA in its updated Short-Term Energy Outlook (STEO) released on Tuesday, the revision was not driven by a narrowing supply deficit or a widening demand excess. The statistical arm of the Department of Energy expects the European crude oil benchmark to average $69/bbl this year, $3/bbl higher than last month’s estimate, mainly due to elevated geopolitical risk premiums in the Middle East, as the conflict between Israel and Iran continues to simmer. For the second half of the year, Brent is projected at $66/bbl, $5/bbl higher than in June, although the prognosis was compiled before last weekend’s OPEC+ decision to accelerate the easing of production cuts. The latest forecast is based on S&P Global’s macroeconomic assumptions and rests on the tenet of reduced U.S. tariffs on China compared with last month. However, it also factors in a 10% excise duty on the rest of the world once the 90-day grace period expires. As we learned at the beginning of this week, that deadline has been extended by another 22 days, and the smart money would bet on further manipulation of it.
It seems that ambiguous and capricious trade policies make it impossible to adopt a long-term upbeat view of global oil demand. As a result, the EIA left its outlook broadly unchanged for both 2025 and 2026, although the 3Q 2025 projection was cut by 400,000 bpd whilst 4Q was left unchanged, resulting in a collective 200,000 bpd decrease in the July-December period. Global consumption is seen at 103.53 mbpd in 2025 and 104.58 mbpd in 2026, both around the lowest on record. Demand will grow by 790,000 bpd this year and 1.05 mbpd next. It will contract by 80,000 bpd in OECD countries this year and expand by 30,000 bpd in 2026. The engine room of this growth, consequently, is developed nations with annual increases of 870,000 bpd and 1.02 mbpd, respectively.
What makes any price forecast based on EIA estimates gloomy is the supply side of the oil equation. For this year, the 790,000 rise in oil demand is more than offset by the non-OPEC+ supply growth of 1.3 mbpd. Add to that the predicted increase of 510,000 bpd in OPEC production as the unwinding of output constraints gets under way and there is a supply surplus of 1.07 mbpd for the whole of 2025, compared to 60,000 bpd in 2024. The third quarter will see a stock build of 740,000 bpd and 4Q 1.06 mbpd. OECD stockpiles at 2.815 billion bbls and 2.826 billion bbls in the coming quarters will sit comfortably above the corresponding periods of 2024, when Brent averaged $79/bbl and $74/bbl. The current curves around $69/bbl and $67/bbl seem fair, and the comparison with last year’s levels suggests limited upside potential.
For 2026, demand growth will be twice as much as the 520,000 bpd increase in non-OPEC+ supply, the product of a substantial 470,000 upward revision in output from outside the production alliance. The call on the organisation’s oil will jump from 42.13 mbpd this year to 42.65 mbpd in 2026. It will, however, be coupled with an estimated OPEC+ output of 43.79 mbpd, a year-on-year increase of 590,000 bpd as the attempt to reclaim market share continues in the EIA’s view. Global and OECD commercial stockpiles will swell every single quarter of 2026 and given the faithful inverse relationship between OECD stocks and oil prices, the impact of the former on the latter will be evident. There is currently an understandable reluctance to look beyond the near term, but if the latest oil balance provided by the EIA comes anywhere near reality, a rally above $75/bbl basis Brent will be deemed a more than tempting selling opportunity
Overnight Pricing
10 Jul 2025