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Crude oil caught between supply surge and geopolitical tensions
Commodities
Ole Hansen
Head of Commodity Strategy
Key points:
- The global crude oil market continues to navigate a complex web of supply pressures and geopolitical crosswinds.
- Brent crude trades just below USD 70 per barrel, after recently being rejected above, overall leaving prices stuck near the middle of the one-year-old wide range.
- OPEC's quest to regain market share has so far been successful, with prices holding up well amid strong summer demand, and emerging signs high-cost producers struggle to grow.
- Near-term focus on the risk of secondary sanctions on Russian exports as well as a tight diesel market lending support.
- Natural gas slides back below USD 3, close to a year low, amid robust production, strong seasonal stock build, and milder mid-August weather.
The global crude oil market continues to navigate a complex web of supply pressures and geopolitical crosswinds, with prices holding up surprisingly well despite expectations of an emerging supply glut once the peak summer demand season comes to an end, driven by rising OPEC+ output and fading global demand growth amid tariff-related demand concerns. Brent crude is currently trading just below USD 70 per barrel, after recently being rejected above USD 70, overall leaving prices stuck near the middle of the wide sub-60 to just above 80 range seen during the past year. Yet, persistent geopolitical risk and tightness in the refined products market, especially diesel, are helping to support prices for now. While the crude oil futures, both Brent and WTI, trade down around 8% year-to-date, the current backwardated forward curve structure has rewarded investors holding long futures positions, which on a monthly basis is rolled from a higher-priced contract into a lower-priced deferred. Taking this into account, the total return in Brent and WTI is currently flat on the year, with the two diesel contracts offering the only positive return at this stage. Opposite to this positive carry providing tailwinds, the complete opposite situation is seen in natural gas, where higher prices in the future—currently 29% in a year's time—continue to attract short sellers, preventing the price from gaining ground while making it exposed to selling during periods, like now, where fundamentals struggle to support.
OPEC+ supply push vs. demand uncertainty
Crude prices trade higher today following a four-day slump after traders digested another bumper production increase from a group of eight OPEC+ producers. With the 2023 voluntary cut of 2.2 million barrels per day now fully reversed, traders ponder what the wider group might do with a 1.66 million barrels per day cut that was also implemented that year. So far, the group's quest to regain market share from other producers has been successful, with prices holding up very well amid strong summer demand, and emerging signs high-cost producers, especially in the US, are pulling back with production seeing no growth for the past 18 months, currently stuck around 13.3 million barrels per day.
With OPEC+ prioritising market share through rising production keeping prices relatively low, thereby tipping the market into surplus, growth concerns in the US and China—exacerbated by protectionist policies and weakening trade flows—are putting a lid on consumption forecasts. A recent deterioration in US economic data, most notably last week's dismal jobs report and yesterday's ISM Services data, which showed firms are pulling back on hiring as costs rise, adds to broader macroeconomic unease, with stagflation concerns once again receiving a great deal of attention.
Secondary sanctions threaten Russian exports
Among the most significant bullish catalysts in recent days is the prospect of expanded US secondary sanctions targeting countries that continue to import Russian crude. President Trump has pledged to escalate penalties, raising tariffs on Russian oil buyers from 25% to potentially 100%, with India as a primary target.
These threats are already having an impact. Indian refiners are reportedly re-evaluating their Russian crude purchases, which could lead to significant disruptions. India has emerged as Russia's largest crude customer since 2022, taking in around 2 million bpd. A meaningful drop in Indian demand for Russian oil would leave a large gap in the market and potentially tighten global supply, keeping prices supported. Thus, the geopolitical risk premium remains—for now—a strong counterweight to OPEC+ supply growth.
Diesel market tightness lends support
Adding to the price resilience is the continued tightness in global diesel markets. Inventories across key hubs—including the US, Europe, and Singapore—remain roughly 20% below their 10-year seasonal averages. The shortfall is linked to a combination of factors: reduced Russian diesel exports due to sanctions, limited refining capacity, and lower availability of medium-to-heavy crude grades suitable for diesel production. With industrial activity and transportation demand peaking in the Northern Hemisphere summer, refiners have struggled to keep pace.
This refined product tightness has helped maintain healthy crack spreads and indirectly buoyed crude oil demand, particularly for grades optimised for diesel yields. Speculators have responded accordingly and recently held net long positions in ICE gas oil and New York ULSD (Ultra-light Sulphur Diesel) near three-year highs. A potential risk once inventory levels normalise, potentially triggering a bigger-than-expected correction as longs are forced to exit.
Brent holding up—but for how long?
The current pricing structure—with Brent trading near USD 70—stands in stark contrast to forecasts calling for a substantial supply surplus later this year. With OPEC+ bringing more barrels to market and non-OPEC supply remaining robust, fundamentals appear increasingly skewed to the downside. Still, the market seems willing to look past the approaching glut in favour of nearer-term risks tied to geopolitics and product shortages. In effect, the market is balancing short-term threats against medium-term oversupply, resulting in a surprisingly firm price floor—at least for now. U.S. Natural gas slides back below USD 3.
Meanwhile, US natural gas futures have come under renewed pressure. The front-month Henry Hub contract dropped back below USD 3 per MMBtu for the first time since April, hovering near the year-to-date low of USD 2.85. The decline reflects a persistent oversupply, with domestic production remaining robust and storage levels now 6.7% above the five-year average. Weather forecasts pointing to cooler-than-normal conditions in mid-August have added to the bearish mood by signalling softer air-conditioning demand.
From a technical perspective, the front month contract trades near support with the mentioned year-to-date low at USD 2.85 being joined by USD 2.80, the 61.8% Fibonacci retracement of the rally from the 2024 lows to the 2025 highs.
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The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options..