Oil's Rally: Sustainable or a False Dawn? Assessing Geopolitical Risks and Demand Resilience

The price of West Texas Intermediate (WTI) crude oil has edged toward $65 per barrel in June 2025, driven by OPEC+ production cuts and geopolitical supply risks in the Middle East. Yet, the sustainability of this rally hinges on three critical factors: OPEC+'s compliance with extended cuts, the fragility of non-Iran Middle East supply chains, and China's uneven industrial recovery. This analysis dissects these dynamics while evaluating technical price levels and implications for energy equities.

OPEC+ Policy Shifts: A Double-Edged Sword

OPEC+ has extended its 3.66 million b/d production cuts through 2025, while eight core members, including Saudi Arabia and Russia, maintain an additional 1.66 million b/d voluntary curtailment until 2026. This strategy aims to counterbalance rising U.S. shale output and stabilize prices near $80/bbl. However, non-compliance remains a threat, particularly from Iraq and Kazakhstan, which have consistently exceeded quotas.

The cartel's latest move includes a gradual unwinding of voluntary cuts starting October 2024, with full restoration by September 2025. This phased approach creates uncertainty: if compliance wavers, oversupply could return. Conversely, strict adherence might support prices—if geopolitical risks don't disrupt supply elsewhere.

Geopolitical Supply Constraints: A Fragile Buffer

Middle Eastern tensions, notably between Iran and Israel, pose a wildcard. While Iran's oil exports remain capped by U.S. sanctions, any escalation in regional conflict could disrupt global shipping lanes, such as the Strait of Hormuz—a chokepoint for 20% of global oil trade.

Meanwhile, non-Iran Middle East production faces risks. Saudi Arabia and the UAE, despite their central role in OPEC+, operate near capacity. A sudden outage in either could trigger panic buying. Yet, the market remains oversupplied due to U.S. shale's resilience: U.S. output hit 13.3 million b/d in May 2025, up 1.2 million b/d from a year earlier. This creates a tug-of-war between OPEC+ discipline and non-OPEC+ growth.

China's Industrial Recovery: A Mixed Picture

China's industrial production grew 5.8% YoY in May, marking the slowest pace since November 2024. While domestic consumption and services rebounded—retail sales surged 6.4% YoY—manufacturing PMI dipped to 49.1 in January, signaling contraction. High-tech sectors like 3D printing and EVs outperformed, but construction and heavy industry lagged, weighing on diesel demand.

Crucially, oil demand growth is peaking as EVs displace gasoline use. EVs now account for ~44% of China's auto sales, with LNG-fueled trucks displacing diesel demand. Petrochemicals, though growing, cannot offset declining transportation fuels. The IEA projects China's total refined product demand to peak at 16.4 million b/d by 2027, underscoring a structural slowdown.

Technical Analysis: $64 Support and $67 Resistance

• Current Level: WTI trades at $65.086, hovering near the $64.00 psychological support.
• Immediate Risks: A break below $64.00 could trigger a slide toward $57.00, with further losses to $44.00 if the descending channel's lower trendline fails.
• Bullish Path: A sustained breakout above $67.25 could test $77.00, near 2023 peaks.
• Indicators: The RSI remains bearish below 50, but a recovery above $65.25 might signal renewed momentum.

Macroeconomic Implications for Energy Equities

The oil market's dual narrative—OPEC+ discipline vs. structural demand slowdown—creates volatility for energy stocks. Upstream producers (e.g., Chevron, ExxonMobil) benefit from price stability but face headwinds from EV adoption. Midstream and refining stocks (e.g., Enbridge, Valero) face margin pressures as petrochemical demand growth lags transportation fuels.

Investment Takeaways:
1. Hold physical oil exposure (e.g., via ETFs like USO) if prices stabilize above $65, but set stops below $64.
2. Avoid over-leveraged energy firms with high debt or reliance on U.S. shale's high break-even costs.
3. Consider long-dated oil call options to capitalize on geopolitical risks without downside exposure.

Conclusion

Oil's rally faces a precarious balance between OPEC+ discipline and geopolitical risks versus U.S. supply growth and China's demand plateau. Technical support at $64 offers a floor, but sustained recovery above $67 is needed to signal sustainability. Investors should remain cautious, focusing on diversified exposure and hedging against downside risks.

As the Middle East's political landscape and China's industrial health evolve, the oil market's trajectory will hinge on whether OPEC+ can outmaneuver both structural decline and its own compliance challenges.