Crude oil experiencing uptick yet on track for weekly decline amidst pressured supply conditions
Rewritten Article:
Oil prices bounced back slightly from a 2% drop on Friday, boosted by a glimmer of hope in the US-China trade war, but the market is still looking at a weekly decline due to worries about oversupply from OPEC+.
On Friday morning, Brent crude rose by 31 cents to $66.85 a barrel, saving a 1.7% drop for the week so far. US West Texas Intermediate (WTI) crude climbed 35 cents to $63.12 a barrel, reversing a 2.4% decrease for the week.
Senior analyst Anh Pham from LSEG stated, "Today's oil prices are slightly up due to signs of de-escalation in the US-China trade war and a possible shift in the Fed's monetary policy, contributing to a broader market recovery." However, "on a weekly basis, we're seeing prices go down because concerns about oversupply persist from OPEC+, while the demand outlook remains uncertain amid ongoing trade tensions. A stronger US dollar is also exerting pressure on crude prices," he added.
US President Donald Trump announced that trade discussions between the US and China were underway, contradicting claims by China that no negotiations have taken place. China is contemplating exemptions for some US imports from its 125% tariffs and is seeking lists of eligible goods from businesses, indicating Beijing's mounting anxiety about the economic consequences of the trade war.
Earlier this month, oil prices plunged due to concerns about global demand following the imposition of higher tariffs, triggering a sell-off in financial markets. Speculations about excess supply continue to swirl, with several OPEC+ members advocating for expediting oil output increases for a second month in June.
In an interview with CBS News, Russian Foreign Minister Sergey Lavrov mentioned that the US and Russia were making progress to conclude the war in Ukraine but critical elements of the deal are yet to be agreed upon.
Despite improved global oil demand recently, driven primarily by a rise in US gasoline consumption and robust distillate demand as cold weather persisted into April, analysts at JPMorgan Commodities Research highlighted a 200,000 barrel-per-day deficit compared to their current estimates for the month.
Soaring OPEC+ production could jeopardize oil prices if supply growth overwhelms demand ***
A cessation of Russia's involvement in Ukraine and the easing of sanctions could allow more Russian oil to flood the global markets. Russia, a leading member of the OPEC+ alliance that includes the Organization of the Petroleum Exporting Countries, is among the world's top oil producers, along with the US and Saudi Arabia.
However, the potential OPEC+ production increase of 411,000 barrels per day (kb/d) starting in May 2025, which expedites the phasing out of voluntary production cuts, may cause downward pressure on oil prices if the supply growth exceeds demand. This adjustment represents three months' worth of planned increments (137 kb/d monthly) crammed into a single month, reflecting confidence in the current market stability yet introducing risks if global demand suddenly softens. Some factors that are causing apprehension include:
1. Questionable Market BalanceThough OPEC+ asserts "sound market fundamentals," the quickened timetable raises the specter of oversupply if demand growth falters amid lingering trade tensions. The IEA has suggested that the actual production increase could be smaller due to existing overproduction by some members, but markets remain wary of any supply increases during uncertain economic conditions.
2. Political and Economic InstabilityTrade disputes often result in reduced industrial activity and weaker oil demand forecasts. A unified production hike during volatile market conditions risks aggravating price drops if demand shrinks, especially as OPEC+ intends to halt or reverse increases based on monthly market assessments.
3. Compensation ChallengesTo ensure that members compensate for historical overproduction from 2024, OPEC+ enforces updated compensation plans by mid-April 2025. This introduces operational uncertainties, as adhering to new quotas and fulfilling historical compensation may strain some producers' capacity to maintain price stability.
4. Inadequate Spare CapacityDespite OPEC's reported spare capacity of around 2.5 million barrels/day among core producers, quickened production increases might deplete this buffer faster, reducing the group's ability to respond effectively to future supply shocks.
- The potential OPEC+ production increase in May 2025, which hastens the phasing out of voluntary production cuts, could create downward pressure on oil prices if the supply growth exceeds demand.
- The quickened timetable for OPEC+ production increase raises concerns about a possible oversupply situation, given the lingering trade tensions and uncertain demand outlook.
- The agreed compensation plans by OPEC+ for historical overproduction from 2024, set to be enforced by mid-April 2025, may introduce operational uncertainties, potentially straining some producers' capacity to maintain price stability.
- Amid continuing trade disputes, a unified production hike during volatile market conditions poses a risk of aggravating price drops if demand shrinks, particularly as OPEC+ intends to halt or reverse increases based on monthly market assessments.
- The escalation in oil production, particularly from countries like Russia, due to easing of sanctions or resolution of conflicts, could potentially jeopardize oil prices if it leads to a significant oversupply in the oil-and-gas industry, with a possible adverse impact on energy finance and the overall global economy.
