Geopolitical Dynamics and Oil Prices: A Complex Landscape for 2025

Oil markets are poised for another volatile year in 2025 as geopolitical uncertainties, production dynamics, and evolving demand patterns converge. Following a year where Brent crude oil averaged around $80 per barrel, the outlook for 2025 suggests prices will oscillate between $70 and $85, with a forecasted average of $76.

Goldman Sachs Research emphasizes that while spare production capacity and non-OPEC supply growth will act as stabilizing forces, geopolitical factors remain critical wildcards that could significantly alter the trajectory of energy prices.

Production Dynamics: Spare Capacity and Non-OPEC Growth

The oil market is expected to maintain a moderate surplus in 2025, with Goldman Sachs projecting an excess of 0.4 million barrels per day. This surplus will be driven primarily by increased production from non-OPEC countries, particularly the United States, Canada, Brazil, and Guyana. Non-OPEC hydrocarbon liquid supply, excluding Russia, is forecasted to rise by 1.7 million barrels per day.

Despite this anticipated growth in production, high spare capacity among OPEC+ producers is likely to cap significant price increases. OPEC+ countries possess the flexibility to adjust supply levels in response to market conditions, which could dampen the risk of extreme price volatility.

The price elasticity of shale oil production also adds another layer of stability, as shale producers can ramp up or reduce output more rapidly than traditional oil producers.

Demand Resilience Amid Decarbonization Trends

Global oil demand is expected to remain resilient, driven by robust growth in emerging markets. As these economies expand at an estimated 4 percent annual GDP growth rate in the latter half of the decade, demand for road and air transportation will rise. Emerging market energy needs are set to play a pivotal role in sustaining global oil consumption.

However, decarbonization efforts, particularly the transition to electric vehicles, will weigh on medium-term demand growth. EV sales, which contributed to a reduction of 0.4 million barrels per day in oil demand in 2024, are projected to drag global demand further by 0.6 million barrels per day by 2026.

While EV adoption will reduce oil consumption in road transportation, challenges persist in decarbonizing sectors like air travel and petrochemical products, ensuring continued demand for oil in these areas.

Geopolitical Influences on Oil Prices

Geopolitical events remain a key determinant of oil price fluctuations. While the nature of these events is inherently unpredictable, their potential impacts can be modeled under broad scenarios.

Iran and Sanctions: A tightening of sanctions on Iran, leading to a reduction of its oil exports by one million barrels per day, could push Brent crude prices into the mid-$80s by mid-2025.

Historically, sanctions on Iran have significantly curtailed its oil exports, with a decline of 2.4 million barrels per day between 2018 and 2020. Current U.S. policy considerations and hawkish rhetoric suggest that further restrictions on Iranian oil could be a realistic possibility.

Middle Eastern Geopolitics: Increased U.S. support for Israel could heighten tensions with Iran, potentially leading to supply disruptions. A six-month disruption reducing Iranian exports by one million barrels per day could push Brent prices to nearly $90 per barrel, even with OPEC+ stepping in to offset the shortfall.

Trade Policies: Conversely, broader-than-expected tariffs from the U.S. could suppress oil demand, driving prices lower. A hypothetical 10 percent across-the-board U.S. tariff could reduce Brent prices to the low $60s by 2026, highlighting the deflationary impact of trade restrictions on global energy markets.

Emerging Trends and Strategic Implications

While geopolitical uncertainty looms large, the broader trajectory of the oil market in 2025 will be shaped by a mix of production dynamics, demand resilience, and policy shifts.

Energy Transition: The increasing adoption of renewable energy sources and the push for decarbonization will continue to influence oil market fundamentals. Companies and investors must navigate this transition carefully, balancing short-term demand for hydrocarbons with long-term shifts toward cleaner energy.

Supply Chain Resilience: With supply disruptions a recurring theme in oil markets, producers and consumers alike will prioritize building resilience. Investments in alternative energy sources, enhanced storage capacities, and diversified supply chains will be critical in mitigating risks.

Investment Strategies: For investors, the current oil market offers a mix of risks and opportunities. A focus on well-capitalized producers with strong operational flexibility and exposure to growth markets may provide a hedge against volatility. Additionally, investments in renewable energy infrastructure and technology present a complementary avenue to capitalize on the energy transition.

Conclusion

Oil prices in 2025 are set to navigate a fine balance between supply-side stability and demand-side resilience, underpinned by geopolitical risks that could cause sudden disruptions. While high spare capacity and non-OPEC production growth will act as stabilizers, the potential for geopolitical shocks remains ever-present.

For market participants, understanding the interplay of these factors is crucial. By closely monitoring geopolitical developments, technological advancements, and global economic trends, stakeholders can position themselves to manage risks and seize opportunities in a rapidly evolving energy landscape. The road ahead for oil markets may be uncertain, but it is one filled with transformative potential.