Well supplied oil market may signal lower prices

In the first weeks of 2025, West Texas Intermediate (WTI) oil prices remained just above USD 70 per barrel (bp), but still below the 2024 average. In fact, with the exception of short-lived flare-ups such as after the announcement of new US sanctions on the Russian shadow fleet in the final days of the Biden administration, for several months the price has remained in the lower part of the trading range prevailing since late 2022.

This may be surprising considering persistent geopolitical tensions, including the Middle East crisis, the war in Ukraine, and President Trump’s threat of tariffs on all US imports.

One explanation is that the market expects the Trump administration to adopt policies in line with the "drill, baby, drill" mantra of the election campaign. So far, however, there have been no significant announcements in this sense, other than lifting the ban on drilling in Alaskan protected areas.

However, oil market fundamentals help rationalise the recent moderation in the oil prices. US oil refiners’ margins, or crack spreads, are more than 25% lower than a year ago, reflecting weak demand for refined products. Chart 1 shows that refining margins lead the price of oil and that at current levels they leave room for a moderate decline.

That the physical oil market is well supplied is also evident in the data on petroleum product inventories from the OECD International Energy Agency (IEA) and the US Energy Information Administration (see Chart 2). In January, when measured in terms of days of consumption, inventories in the US, the world’s largest consumer of oil and refined products, were in line with the seasonal average of the past 15 years.¹

The relative abundance of oil also stems from falling production costs, at least in the US. According to the Federal Reserve Bank of Kansas City quarterly energy survey, the threshold price that makes extracting oil profitable has fallen to USD 62 per barrel/day (bp/d) (see Chart 3). Unsurprisingly, US production has risen to a new all-time high of around 13.5 million barrels per day (mbd). This evidence suggests that US oil supply will remain elevated even if prices were to decline towards USD 65 bp.

In addition, the high spare capacity of OPEC+, estimated by the IEA at almost 6 mbd, has likely contributed to softer oil prices also in relation to potential geopolitical developments. The latest US sanctions against the Russian shadow fleet aim to reduce significantly the Kremlin's ability to finance the war in Ukraine by cutting both the price of Russian oil exports and the quantity of oil it can export.

If the new sanctions are effective, the resulting drop in OPEC+ supply would justify the mobilisation of Gulf countries’ spare capacity to avoid imbalances on the oil market, in line with the cartel’s official objectives. Formally, the Gulf countries could justify raising their output in the context of production increases announced by OPEC+ in June 2024 but subsequently postponed until at least April 2025.

Beyond the direct effects on the oil market, an increase in Gulf countries’ supply would signal a distancing from Russia after the support implicit in policies OPEC+ pursued since 2022. Looking ahead, this could put a ceiling on future oil prices around current levels.

In conclusion, the physical oil market remains well supplied, pointing to a decline in prices. The impact of geopolitical tensions and uncertainties regarding US trade policy is offset by weak demand. Furthermore, the decline in operating costs for US shale oil companies makes prices around or slightly below current levels profitable. In this context, we believe that it would be unsurprising if the price of WTI oil declined to a range between USD 60 and 70 bps during 2025, helping to moderate global inflation.

¹ The average since 2011 does not include the pandemic-affected period of 2020-21.

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