Is the oil price party already over before it’s begun?
The recent dominant narrative surrounding global oil supply has focused on potential headwinds, such as geopolitical tensions, that could affect production and cause prices to skyrocket. But, given the Opec+ announcement, and several other important factors, I believe a more likely trajectory for global oil prices is a downward, bearish one.
This production increase appears to mark the beginning of a strategic unwind of Opec+’s two-year policy of curbing supply, with more increases likely. While forecasting energy demand is notoriously challenging, it’s likely that oil demand will grow marginally this year, by about one million barrels a day.
Central to this sluggish demand is China, where economic malaise and a rapid rise in electric vehicle (EV) adoption have dented consumption. Once responsible for 50 per cent of annual growth in oil demand, China no longer plays the gas-guzzling juggernaut. President Trump’s unpredictable trade policy is also a feature here, and there are signs of a slowdown in global growth, which would further weaken oil demand.
Perhaps the biggest unknown, however, is how tariffs will affect major oil suppliers. Tariffs are being increasingly used as a diplomatic stick. Trump has announced a 50 per cent tariff on Indian goods due to its imports of Russian oil, for example. And a bill moving through Congress would slap a 500 per cent tariff on countries that buy Russian oil. Iran and Venezuela, which, alongside Russia, accounted for 13 per cent of the global oil supply in 2024, are also in the line of fire.
If sanctions on oil were to increase significantly, removing this supply from the market, it could potentially offset the increase in production by Opec+. Moreover, a possible ramification could be an unwelcome spike in global oil prices, which is partly why the chances of severe sanctions remain low.
This matters. No commodity has a greater impact on everyone and everything than oil, alongside natural gas, as we were reminded in 2022, when Russia’s full-scale invasion of Ukraine triggered an energy supply crunch and, consequently, rampant inflation. About 90 per cent of transportation is still dependent on oil, which is why the prospect of a lower oil price is probably welcome news to most readers, with the obvious exception of oil executives.
For British oil bosses, last week was a busy one, with BP revealing its biggest discovery for 25 years and beating profit forecasts, though it now faces the prospect of a lower oil price. But, in such a scenario, oil majors do have levers they can pull, which could act as a buffer against a prolonged period of lower oil prices.
One such example is reducing production costs. BP, as part of a major strategic reset announced in February, is already “reducing and reallocating capital expenditure, significantly reducing costs”, aiming to save $4 billion to $5 billion in total.
More importantly, BP and Shell, especially the former, have been moving far faster than many of their global peers to diversify their businesses amid the wider energy transition. Despite signs of a rollback, and attempts to offload some assets, both have built non-hydrocarbon businesses, such as BP’s EV charging business, Pulse, and significant investments in wind, solar, and hydrogen. Both, for many years, have maintained substantial downstream operations. These diversifiers will help to offset lower oil prices.
Finally, it’s worth keeping in mind that the global energy market is highly interconnected: energy costs in the UK, for example, are ultimately shaped by wholesale prices for oil and gas. This is why, in 2022, as non-renewable energy prices spiralled, drivers of EVs and users of renewable energy suppliers also incurred higher costs. If oil prices decline significantly, we could see this trend in reverse, potentially accelerating the energy transition overall. Long term, this would be supportive of efforts made by oil majors to diversify away from fossil fuels.
A much-loved phrase within the world of commodities is “high prices fix high prices”, meaning that in any highly cyclical market a sudden change in pricing can quickly trigger the reverse. Opec+ retains the power to rapidly lower production once again if it sees fit. For this reason, I’d caution against early celebrations at the prospect of lower energy costs over the next year or two. But certainly, as it stands, the trajectory for global oil prices appears to be a downward one.
Seema Shah is chief global strategist at Principal Asset Management