With the U.S. president’s decision to impose 25% tariffs on countries purchasing oil and gas from Venezuela starting April 2, the rising tensions in the Middle East, and Trump's threats to Iran, one would expect a sharp rise in oil prices. But that hasn’t exactly happened, unlike with the price of gold.
Although prices have edged up, there hasn’t been a dramatic rally. Are traders bracing for the full return of Russian oil to the markets? Or is the weak response to major events signaling that oil prices have peaked and we might be heading for a prolonged decline from now on?
Several factors seem to be at play.
Even assuming that hopes for the success of peace talks on the Ukrainian conflict do not play a role, the pressure comes from fears of slower economic growth in the United States and additional supply from OPEC+, whose production will increase by 135,000 barrels per day in May.
Russia's top OPEC+ official, Alexander Novak, said the supply increase could be reversed as early as May if prices fall. However, OPEC's spare capacity is near record levels, and oil production has significantly increased in the United States and non-OPEC countries.
Therefore, we could say that no supply shortages are expected. No wonder Goldman Sachs has cut its Brent crude oil price forecast for the end of the year to $71, while Barclays analysts now expect Brent prices to remain around $74 per barrel this year, down $9 from the previous forecast.
The Central Bank of Russia has gone even further, warning of the risk of oil prices crashing, like in the 1980s (when prices peaked at $35 per barrel in 1981 and dropped to $10 by 1986). However, oil-producing countries would need to back out of their current production agreements for this to happen.
If the latter scenario occurs, it will not only hurt the Russian, Saudi, and other major oil-producing economies. U.S. oil producers need prices around $80 per barrel to increase production, and if prices continue to fall, it will subsequently negatively affect their profitability.
What could drive prices higher?
Assuming the market has already discounted the impact of the new restrictions imposed on Venezuela and Iran, a military operation against Tehran could still have an impact. Iran accounts for at least 3% of world oil production, and if that supply is disrupted, prices could rise sharply, though probably not for long.