Oil prices face mounting fundamental pressure as potential shifts in global oversupply dynamics emerge, driven by China’s decelerating stockpiling, which is tied to the rise of electric vehicles curbing oil demand.
However, short-term supply risks are expected to provide a counteracting risk premium.
Analysts with ING Group believe that even as tensions in Iran and supply risks ease, these have not disappeared yet.
Immediate geopolitical impact and volatility
The oil market’s price is currently being dictated by developments in Iran, with a barrel of Brent crude oil climbing to nearly $67 earlier this week, marking its highest point since early October.
However, Brent oil prices fell by $3 on Thursday, following the recent statements from US President Donald Trump, which led to a reduced risk of immediate American intervention.
On Friday, prices had recouped some of those losses amid uncertainty surrounding Iran and supply.
The price drop occurred because the US refrained from immediate action against Iran, despite ongoing domestic protests.
Recent speculation about potential military intervention by the Trump administration had been increasing, which had raised fears not only about Iranian oil supply but also about wider risks to supply across the Persian Gulf region.
Escalation risks: Iran and the Strait of Hormuz
The situation still carries the significant risk of escalation, according to Commerzbank AG commodity analyst Barbara Lambrecht.
This concern is fueled not only by the potential loss of Iranian exports, which had reached nearly 1.9 million barrels per day this past fall, according to Bloomberg.
A major concern is the potential for an Iranian blockade of the Strait of Hormuz if tensions escalate, as this chokepoint handles approximately a quarter of the world’s seaborne oil supply.
“Any escalation with Iran will also raise concerns about potential disruption to oil flows through the Strait of Hormuz, a chokepoint where around 20m b/d passes,” Warren Patterson, head of commodities strategy at ING Group, said in a report.
While risks have eased somewhat, they remain significant, keeping the market nervous in the short term.
If signs of a sustained easing appear, attention will likely shift back to developments in Venezuela.
Oil that was recently sanctioned or blocked is expected to gradually re-enter the world market, Commerzbank’s Lambrecht said.
The International Energy Agency’s (IEA) monthly report is expected to refocus attention on the oil market’s fundamentals next week.
This follows a week where new forecasts from the US Energy Information Administration (EIA) and the Organization of the Petroleum Exporting Countries were largely overshadowed by the escalating situation in Iran.
The EIA and OPEC now share similar forecasts for global oil demand growth, both having provided an initial outlook for 2027.
However, the IEA is expected to maintain a more cautious stance, likely continuing to predict a significant oil market oversupply this year.
“However, the decisive factor for the oil price is the extent to which this oil flows into the world markets and becomes visible in swelling inventories,” Lambrecht said.
Long-term fundamentals and oversupply outlook
China appears to have significantly drawn down its reserves last year to accumulate stocks.
Conversely, stock levels in the Organization for Economic Cooperation and Development countries remain consistent with their typical range.
The fundamental outlook for oil prices could face increased downward pressure if a larger portion of overproduced oil is directed towards industrialized nations, according to Lambrecht.
This shift could occur if China reduces its stockpiling efforts, a likely consequence of rising electric vehicle adoption that simultaneously curbs overall oil demand, Lambrecht added.
Meanwhile, ING’s Patterson believes that the longer the rhetoric surrounding Iran goes on, oil prices may struggle eventually.
However, the longer this goes on without any US intervention, the risk premium will continue to fade, allowing more bearish fundamentals to dominate.
Despite ING’s bearish market outlook, the prompt ICE Brent timespread is showing strength.
“The spread held up relatively well yesterday despite weakness in the flat price,” Patterson said.
This suggests some tightness in the spot market, likely due to a decline in Kazakh oil flows from the CPC terminal.
At the time of writing, the price of West Texas Intermediate crude oil was at $59.91 per barrel, up 1.2%, while Brent was at $64.50 a barrel, also 1.2% higher from the previous close.
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