The remarkable recent price stability in crude oil markets may be coming to an end.
With the brief exception of a strong price rally to nearly $120 a barrel during the first months of Russia’s full scale invasion of Ukraine in 2022, WTI crude oil prices have really not traded outside of a roughly $65-$90 per barrel trading range. In reality, every oil trader has that price range in their heads because since November of 2022, that’s the price band inside of which front month West Texas Intermediate oil futures, the U.S. benchmark for crude oil prices, have traded.
As of this writing, front month WTI crude oil futures traded on the CME are around $67 per barrel. If recent history is any guide, prices should hold at or near current price levels and perhaps stage a rally. Certainly any increase in geopolitical tensions, an unforeseen supply disruption, or a steadily weakening dollar could easily start a crude oil price rally from here, but there are new headwinds developing that could affect the status quo.
It is not out of the realm of possibility that prices could finally break down below their four year support level of around $65 a barrel. In fact, it seems more and more likely that crude oil will finally head lower from here.
First, markets hate uncertainty. Right now, the United States, with the world’s largest economy, most powerful military, and most influential political clout, is undergoing tremendous change that will impact the global economy in as yet, unknown ways. General levels of uncertainty are growing with ever changing and rapidly evolving tariff wars combining with cuts in U.S. government spending that are already starting to ripple through the global economy. All of this will affect global markets and long-term corporate planning which can, and will, in the short term at least, likely slow the global economy as well as demand for oil.
Second, and unquestionably the most important headwind of all where oil prices are concerned, is that OPEC+ has decided to ease longstanding oil production cuts. It’s no coincidence that WTI oil futures have not traded with prices as low as $65 since March of 2023, because the OPEC+ production cuts that are now being eased originally took effect in April of 2023. Nothing puts more pressure on prices like increased supply, and OPEC and it’s allies are doing just that: increasing oil production after two years of intentionally suppressing oil supplies.
Third, there could be potential peace in Ukraine that could result in softening economic restrictions on Russia, the world’s third largest producer, and widely believed second largest exporter, of oil and oil products. To be sure, no knows for certain what Russia’s current status as an oil exporter truly is right now, because much of their exporting is now done in secret through shadow fleets that are not well monitored. But there is no doubt that the energy powerhouse will return to the export markets with gusto the moment sanctions relief is obtained.
Much can happen to affect oil prices, and people often focus on the myriad of unforeseen risks that could prompt a major supply disruption sending oil prices to dizzying heights. More likely though, is the steady unfolding of the three geopolitical events and decisions described above that will work to drive oil prices lower from here.