Ron Busso
Global oil markets are facing increasingly sharp and frequent price shocks as geopolitical tensions, uncertain stockpiles and tightening Western sanctions leave many traders confused.
The growing influence of external, unpredictable forces on the world’s largest and most liquid commodity markets has raised questions about how accurately prices reflect physical fundamentals.
Indeed, the global oil market appears to be struggling to grasp the fundamental balance between supply and demand. The International Energy Agency predicts oil production this year will exceed demand by 3.7 million barrels per day, or more than 3% of global consumption.
But the price tells a different story. Benchmark Brent crude oil prices have fluctuated in recent weeks, but remain steady at above $65 per barrel.
Additionally, the forward curve is in a steep recession, a structure typically associated with tight supply.
So what explains this? The past few weeks have been affected by uncertainty surrounding the situation in the Middle East. The risk of a U.S. military attack on Iran and the possibility that the conflict could spread throughout the region helped push oil prices toward $70 a barrel.
As the headlines came and went, the CBOE Crude Oil Volatility Index rose to its highest level since the 12-day Israel-Iran war last June.
While U.S.-Iran tensions will ultimately only be a short-term factor unless the conflict truly spirals, other long-term trends threaten to obscure the supply-and-demand picture for months.
Stock prices are rising
One sign of market oversupply is usually an increase in storage, with inventories increasing globally. However, geopolitical fragmentation creates regional differences that complicate this simple equation.
Morgan Stanley forecasts that global crude oil inventories will increase by 520 million barrels (about 7%) in 2025, and by an additional 730 million barrels this year. Most of the storage is in China, with about 800,000 barrels per day stored over the past year, according to ROI estimates. This figure means it will increase by more than 300 million barrels by 2025, accounting for the bulk of the oversupply.
However, China’s exact oil reserves and storage capacity remain unclear. Most strategic reserves are stored underground, beyond satellite monitoring, limiting visibility into how much China actually stores and how much more it can add.
There is also uncertainty in China’s purchasing strategy. The Chinese government tends to reduce purchases when prices rise, and stockpiling may have slowed after prices recently rose toward $70 a barrel. But again, the market doesn’t know that.
This uncertainty is a major blind spot for the oil market, changing the way it interprets rising storage levels.
Historically, oil prices have closely tracked inventory movements in Organization for Economic Co-operation and Development countries, particularly the United States and Europe, which have long dominated global demand. Storage increases were typically seen as bearish.
However, Morgan Stanley analyst Martin Lutz said the buildup in Chinese stocks is now viewed as bullish, reflecting strong demand that offsets the negative price signal from visible OECD inventory buildup.
This possibility could help explain why oil prices have not fallen even as global inventories have increased.
geopolitical turmoil
Western sanctions against several oil-producing countries further complicate the situation.
China, India and Turkey have absorbed most of the sanctioned oil from Russia, Iran and Venezuela in recent years, and will import about 3.5 million barrels per day by 2025, according to Kpler. That is changing, however, following the European Union’s ban on imports of fuel refined from Russian crude that went into effect on January 21, and President Donald Trump’s increased pressure on India to curb its purchases of Russian crude.
India has already cut its imports of Russian crude oil this year to about 1 million barrels per day from 1.6 million barrels per day in 2025, and President Trump has promised to further reduce purchases.
These changes are forcing widespread adjustments in the market. Western regulations have increased demand for unlicensed barrels and compliant tankers, raising costs for refiners, especially in Asia, which relies heavily on offshore crude because of limited local production. 29dk2902l
Asian refining margins have been lower than European refining margins since early January, with the former averaging around $6 per barrel since the beginning of the year, compared to $9 per barrel for the latter. This difference is mainly due to logistics costs.
Keshav Lohiya, CEO of Hi-Lo Analytics, said, “Freight transportation will be critical to regional differentiation this year.”
Freight rates for very large crude carriers (VLCCs) bound for Asia from the Middle East or West Africa have increased nearly 150% since the beginning of the year, according to LSEG data.
Current transportation costs can exceed $3 per barrel for Asian refiners, compared to nearly $2 per barrel for European refineries.
At the same time, the restrictions have led to a buildup of sanctioned crude oil at sea as sellers struggle to find buyers.
Russia, Iran and Venezuela account for about 30% of the 1.3 billion barrels of oil currently in transit, far more than they account for in exports, a sign that emissions are slowing as traders struggle to place barrels.
As a result, the market appears both plentiful and unusually tight.
This tension reflects a market increasingly driven by geopolitics and the actions of opaque stockpilers, rather than easily discernible fundamentals.
Until transparency improves or political risks abate, oil prices are likely to remain out of sync with measured supply.
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(Ron Busso; Editing: Paul Simao)
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