Paisie: Uncertain Demand Roils Oil Market Outlook

Since April, the uncertainty surrounding the oil market has only increased.

During the first week of April, the market was upended by two surprises: an announcement of additional tariffs by the Trump administration that are significantly greater in magnitude than expected, coupled with members of OPEC+ agreeing to unwind their supply cuts at a greater extent in May than previously expected (411,000 bbl/d vs. 135,000 bbl/d).

The last time the oil market had seen a simultaneous shock to both the demand side and the supply side of the equation was in 2020 during the early days of COVID-19, when Russia initially refused to participate in production cuts, which resulted in the price of Brent crude falling below $30/bbl.

As of mid-April, the price of Brent crude was hovering around $65/bbl and the price of WTI was hovering around $61.50/bbl.

Before the unexpected events of early April, Stratas Advisors was forecasting that during the second and third quarters, the price of Brent crude would move in the range between $75/bbl and $80/bbl and the price of WTI would move in the range between $70/bbl and $75/bbl. The forecast was based on our expectation that demand would outstrip supply slightly during this period, with demand growing mainly because of the improving situation in Asia (including China) coupled with relatively strong demand in the U.S. From the supply side, we were expecting OPEC+ to remain cautious in unwinding previous supply cuts and non-OPEC supply would increase by less than 1 MMbbl/d during 2025.

The outlook for oil demand is now in doubt because of the uncertainty around tariffs and the impact on economic growth and oil demand, with several forecasters reducing their demand forecasts, as illustrated by the research arm of OPEC reducing its forecast for oil demand growth in 2025 from 1.45 MMbbl/d to 1.3 MMbbl/d—which happens to match our forecast that was published at the beginning of the year.

At this time, we are not inclined to make any material changes to our oil demand forecast for several reasons. OECD demand is relatively stable and less affected by economic uncertainty, including U.S. demand, which is supported by structural factors, and EU demand, which is supported somewhat by the significantly stronger euro and the expectations for more accommodating monetary policies.

While non-OECD demand is more vulnerable, the recent downturn in oil prices provides some support for non-OECD demand.

From a supply-side perspective, there is also uncertainty. The significant drop in oil prices increases financial pressure on U.S. shale producers, which creates doubt about their ability (and desire) to maintain their planned levels of capex and drilling programs. Even before the downturn in oil prices, we were expecting that the U.S. shale sector would not add any material volumes this year. We have not changed our views, but the downside risk has increased.

The potential drawback of the U.S. shale producers could provide OPEC+ with the opportunity to regain some market share. Additionally, there are some thoughts that Saudi Arabia may push for more volume to drive oil prices down further to encourage chronic overproducers (including Iraq and Kazakhstan) to reduce their supply to account for previous overproduction.

Our view, however, remains that members of OPEC+ will maintain discipline and be proactive in aligning supply with the demand. Supportive of our view is that when members of OPEC+ announced the latest increases in supply, the same members also stated that the gradual increases may be paused and even reversed depending on market conditions.

Moreover, because of the depressed oil prices, Russia is facing even more economic pressure and is unlikely to be supportive of any further volume increases by members of OPEC+ that would threaten a recovery in oil prices. Without the support of Russia, we think it is unlikely that OPEC+ would move forward with supply increases that could undermine the cooperation among OPEC+ members, which is increasingly critical to the stability of the oil market.

We are expecting the price of Brent crude to stay above $60/bbl and will move back toward $70/bbl as we progress through the second quarter. From an upside perspective, a favorable resolution of the tariff issues will push the price of Brent crude to $75/bbl and the price of WTI to $70/bbl.

From a downside perspective, a spiraling trade war could lead to the price of Brent crude breaking below $50/bbl with it becoming more difficult for members of OPEC+ to maintain cooperation. However, we think that this downside scenario has a probability of substantially less than 50%.