The recent U.S.-Russia talks in Saudi Arabia about ending the war in Ukraine could introduce a new bearish factor for oil prices this year.
Top officials from the U.S. and Russia are discussing the possibility of ending the war without Ukraine’s participation. If these talks lead to an agreement and potential sanctions relief on Russian oil exports, the global oil market may see a price drop of up to $10 per barrel for the Brent benchmark, according to Bank of America.
Sanctions Relief Could Ease Oil Prices
Bank of America analysts noted that if sanctions relief allows more Russian oil to reach global markets, prices could fall by $5 to $10 per barrel. Currently, Russian oil has to travel long distances to reach markets like India and China. If sanctions are lifted, more oil could be readily available, pushing prices lower. Additionally, the relief might increase diesel supply from Russia, which could lower refining margins worldwide.
“Global refining margins could also fall,” the analysts stated. While margins have been normalizing since the start of the Ukraine war, they could decline further if sanctions on Russian diesel are lifted.
However, if the peace talks fail, or if the U.S. imposes stricter sanctions on Russia, oil prices could spike instead.
Bearish Signals in the Market
The potential peace deal is just one of several factors weighing down oil prices in early 2025. Trade tensions, particularly between the U.S. and China, could also stifle economic growth and reduce oil demand. Trade uncertainties, including ongoing tariff threats, have created instability, making it harder for businesses to plan for the future.
In January, oil prices surged due to concerns over tightened sanctions on Russia and Iran, as well as low global stock levels. But by February, those bullish signals were overshadowed by worries about economic growth and oil demand, especially as U.S. tariffs threatened to escalate.
By the first week of February, crude oil prices had reversed all of their earlier gains. This shift in market sentiment came after former President Trump began imposing new tariffs, sparking fears of further trade conflicts.
In the week leading up to February 11, hedge funds and other money managers continued to pile on bearish positions, betting that oil prices would fall. According to ING’s commodity strategists, the number of bearish positions in both WTI and Brent futures increased during this period.
Additional Supply from Iraq and Kurdistan
Another bearish factor for oil prices is the anticipated resumption of oil exports from Iraq’s Kurdistan region by the end of March. This move is expected to add around 400,000 barrels per day to global oil supply, although it is unclear how much of this will be allocated to international markets versus domestic consumption in Iraq.
OPEC+ Plans to Ease Production Cuts
On top of these factors, OPEC+ is set to increase oil supply starting in April, in line with its plan to ease production cuts from the second quarter of 2025. However, if the peace talks lead to a drop in oil prices, OPEC+ may have to reconsider its production strategy.
April is also seen as a potential deadline for the U.S. to broker a ceasefire agreement in Ukraine. If a peace deal reduces oil prices significantly, OPEC+ could be forced to adjust its production plans once again.
Potential Support from U.S. Sanctions on Iran
While the market faces several bearish factors, there is a potential for oil prices to be supported by the continuation of U.S. sanctions on Iran. President Trump’s “maximum pressure” campaign has kept Iranian oil off the market, which has helped maintain higher oil prices.
The ‘Drill, Baby, Drill’ Dilemma
If a peace deal results in a $10 drop in oil prices, it would align with one of President Trump’s key campaign promises: easing energy costs for American consumers. However, this drop would not likely lead to a boom in U.S. oil production.
Despite the lower prices, U.S. oil producers are unlikely to ramp up drilling. Instead, they are focusing on cost efficiency and returning capital to shareholders, rather than pursuing an aggressive drilling expansion. Even at current prices, U.S. producers have shown little interest in significantly increasing production, signaling that the “drill, baby, drill” era may be over.
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