Kissler: Traders’ Global Oil Plan? ‘Wait and See’

President Donald Trump has promised to bring down energy prices, especially of oil products. As of this writing, the promise has been kept, with crude prices dropping from more than $75/bbl in January to the low $60s/bbl area by late May.

Prices are being brought down by the combination of tariff negotiations, which have been slowing global trade, and OPEC (mostly Saudi Arabia) backing Trump by increasing production. Altogether, this combo has taken the global oil market from a tight equilibrium to a possibly oversupplied situation.

Looking forward, while lower prices at the pump are good for the consumer in the near term, the long game may be more complicated, and whether the consumer will continue to benefit remains to be seen.

Politicians love cheap gasoline prices, which are heavily correlated with approval ratings. However, as the oil industry knows all too well, maintaining cheap oil prices without damaging the domestic infrastructure is a fine balancing act.

One lesson learned from the past is that extremely cheap oil prices usually lead to sharply higher prices in the distant future.

That’s because cheap prices discourage oil production, and this lower production (and thus less supply) raises prices until an equilibrium is reached once again. Disturbing this equilibrium in the first place is no laughing matter, as the resulting tight supplies and higher prices can take months, if not years, to recoup and replace production, which causes an upside price squeeze.

Global question marks

Meanwhile, there is already a balancing act that looks to be in play globally. The oversupply is being offset by further decreases in exports from imposed sanctions on Iran and possibly Russia. Iran exports approximately 1.8 MMbbl/d, along with LPG, mostly to China. Altogether, that amounts to more than $50 billion in yearly revenue which Iran and Russia use for infrastructure along with nuclear enrichments and conventional weapons programs.

Kazakhstan (a distant tie to Russia) also has been increasing oil production, now up to more than 2 MMbbl/d, which is mostly exported. The former Soviet republic is now not only overproducing quotas set by OPEC, it has stated recently that it will ignore OPEC’s quotas, explaining that it is prioritizing national interests over the interests of OPEC+.

In response, OPEC has sped up the time frame of bringing on more global production, moving up the increases that were supposed to trickle into late 2026. Now these increases can come as soon as this year, perhaps to punish Kazakhstan and Iraq for overproducing.

One counter note is that OPEC+ is famous for overpromising and underproducing; nevertheless, we will probably still see more barrels added globally.

Finally, as trade negotiations between the U.S. and countries targeted by the Trump administration’s tariffs continue, LNG is becoming a so-called “Trump card.”

Countries with emerging economies such as Vietnam and Indonesia may be willing to take U.S. LNG to offset deficits in trade. As a result, Permian producers that had penciled in natural gas as a “byproduct” may have an unexpected revenue stream that may help tide them over in the near-term.

The bottom line

The Trump administration has a lot of moving parts to manage to keep oil prices low but high enough to keep domestic production profitable.

Meanwhile, the administration is trying to demilitarize Iran, along with trying to achieve peace between Russia and Ukraine. Altogether, this is not a short order.

The sum of the equation, at least in the near-term, will be “wait and see” by traders, followed by increased volatility as the data and imposed sanctions oscillate. A quick trade negotiation between the U.S. and China would likely neutralize fears of destroyed oil demand, at least for now—but whether that will happen remains to be seen.