Oil Holds Near One-Month High Amid Supply Woes

Oil prices have been on a rollercoaster ride in recent months, but they are currently holding near a one-month high, set for their third consecutive week of gains. This surge is largely attributed to supply woes and geopolitical tensions that have disrupted the global oil market. The Organization of the Petroleum Exporting Countries and its allies (OPEC+) have extended their production cuts, which have been a significant factor in supporting oil prices. However, the sustainability of these gains remains a topic of debate among analysts.



The recent gains in oil prices can be attributed to several key factors. Firstly, the extension of crude oil production cuts by OPEC+ member countries, including Saudi Arabia, Russia, Iraq, United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman, has led to a reduction in oil supply. These cuts, which were initially adopted in April 2023 and November 2023, have been extended until the end of December 2026. This means that the total output cuts by OPEC+ members amount to 5.86 million barrels per day (mb/d), or about 5.7% of global demand. This reduction in supply is aimed at stabilizing the market and supporting prices amidst weak demand and booming production outside the group.

Geopolitical tensions have also played a role in driving up oil prices. The intensification of geopolitical conflicts necessitates formulating economically effective coping strategies, which requires scientifically understanding the economic losses caused by oil supply disruptions and their evolutionary patterns. For instance, a 20% disruption in oil imports through the Malacca Strait, lasting for 90 days, would result in total economic losses of 62.7 billion yuan for China, with 70% of the total economic losses incurred within the first 30 days. This highlights the vulnerability of global oil supply chains to geopolitical risks, which can lead to sudden spikes in oil prices.

However, the sustainability of these factors in the context of the broader economic and geopolitical landscape is questionable. Analysts with S&P Global Commodity Insights have expressed concerns that delaying the cut tapering would not prevent a supply glut. "Market fundamentals still point to crude oil supply growth outpacing demand growth for crude in 2025 -- even if OPEC+ keeps production flat," said Jim Burkhard, vice president of research for Commodity Insights. This suggests that the current gains in oil prices may not be sustainable in the long term, as supply growth from countries outside OPEC+ and slower demand growth could put downward pressure on prices.

Furthermore, the U.S. Energy Information Administration (EIA) forecasts that benchmark Brent crude oil prices will fall from an average of $81 per barrel (b) in 2024 to $74/b in 2025 and $66/b in 2026. This forecast is based on strong global growth in production of petroleum and other liquids and slower demand growth, which could offset the impact of OPEC+ production cuts and geopolitical risks. The EIA also notes that significant uncertainty remains in all aspects of oil supply and demand, which could influence oil prices given any differences compared with their forecast.



In conclusion, while supply cuts by OPEC+ countries and geopolitical tensions have driven recent gains in oil prices, the sustainability of these factors is uncertain. The broader economic and geopolitical landscape suggests that supply growth from countries outside OPEC+ and slower demand growth could put downward pressure on prices in the long term. Investors should remain cautious and monitor the evolving dynamics of the global oil market closely.