Despite heightened U.S.-Iran tensions, oil prices show only a minor risk premium (~$2). The market believes an oversupplied global market, coupled with a U.S. preference for surgical strikes that avoid energy infrastructure, will prevent a major supply disruption.
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While Venezuela is a minor oil supplier to China, Iran is a substantial source of crude and heavy oil used for infrastructure projects like asphalt. A regime change in Iran could lead to the country selling its oil to the West instead of China, creating a significant economic and geopolitical destabilization for Beijing.
Despite new US sanctions on Russian oil producers, Goldman Sachs remains bearish, forecasting a decline. They argue that spare capacity from OPEC, exemptions for buyers, and the reorganization of trade networks will mitigate any supply disruption, preventing a sustained price spike and leading to lower prices by 2026.
Despite healthy global oil demand, J.P. Morgan maintains a bearish outlook because supply is forecast to expand at three times the rate of demand. This oversupply creates such a large market imbalance that prices must fall to enforce production cuts and rebalance the market.
The oil market's lack of reaction to the events in Venezuela demonstrates a key principle: short-to-medium term prices are driven by current production and delivery capacity, not the theoretical size of underground reserves that may take years and billions to develop.
Contrary to bearish sentiment, oil demand has consistently exceeded expectations. The market's weakness stems from a supply glut, primarily from the Americas, which has outpaced demand growth by more than twofold, leading to a structural surplus and significant inventory builds.
The crude oil market is trapped in a recurring monthly pattern. For the first half of each month, the forward curve weakens on fears of a supply glut, nearly flipping into contango. Then, a sudden geopolitical shock mid-month causes the curve to snap back into pronounced backwardation, delaying the surplus.
A potential price collapse will be averted by the market's own circular logic. Sub-$60 prices will stimulate an extra 500,000 barrels per day of demand from price-sensitive regions while simultaneously forcing high-cost non-OPEC producers to shut down production, creating a natural market equilibrium.
Despite his stated goal of lowering oil prices, President Trump's aggressive sanctions on Venezuela, Iran, and Russia have removed significant supply from the market. This creates logistical bottlenecks and "oil on water" buildups, effectively tightening the market and keeping prices higher than they would be otherwise.
Unlike more volatile shale production, large-scale offshore projects from Exxon in Guyana and Petrobras in Brazil are sanctioned years in advance. This provides analysts with a highly reliable and visible pipeline of new, low-cost barrels, cementing the forecast for a sustained supply surplus.
Since the U.S. is a net oil exporter, controlling massive reserves like Venezuela's is less critical. The real power now lies in controlling the flow of oil to adversaries like China, which is dependent on imports and could be crippled by a supply cutoff.
