The Current Volatility and Complexities of the Oil Market and the Road Ahead

The global oil market finds itself at a critical juncture, marked by heightened volatility, shifting fundamentals, and geopolitical uncertainty. Prices have staged a modest recovery in recent weeks, yet remain materially below early-year levels. Traders are contending with a complex mix of softening demand, robust supply growth, and elevated geopolitical risks—especially following recent escalations in the Middle East.

OPEC+ remains a pivotal force, with the upcoming July 6 meeting closely watched for potential adjustments to output policy. Meanwhile, U.S. shale activity is retreating under cost pressure and regulatory uncertainty, contributing to a more cautious production outlook. On the demand side, slower global growth and energy transition headwinds have trimmed forecasts, particularly in Asia.

Volatility is likely to persist as markets navigate these overlapping forces. In the near term, price direction will hinge on OPEC+ decisions, geopolitical flashpoints, and macroeconomic signals. Over the medium term, the industry faces a broader transformation: balancing traditional energy security with accelerating decarbonization efforts.

The road ahead calls for strategic agility both from producers managing capital discipline and from investors interpreting a landscape where political risk, structural demand shifts, and policy intervention increasingly intersect.

Price and Market Overview

As of late June 2025, oil prices have experienced a modest recovery. Despite this rebound, prices remain approximately 19% below levels seen at the beginning of the year, reflecting persistent macroeconomic headwinds and shifting supply-demand dynamics.

Investor sentiment in oil-linked financial instruments has also softened. The United States Oil Fund (USO), a widely followed oil futures ETF delivered a strong month with a notable rally, but this came with sharp intra-month volatility and a significant late-month pullback, underscoring ongoing volatility and caution across energy markets.

Supply Dynamics

Global oil supply continues on an upward trajectory. Production is expected to grow by 1.8 million barrels per day (mb/d) in 2025, reaching approximately 104.9 mb/d. This expansion is led largely by non-OPEC+ producers, who are forecast to add 1.4 mb/d this year and 840,000 b/d in 2026.

OPEC+ has also ramped up production, increasing output by 411,000 b/d in June to stay aligned with quota frameworks. Major contributors to this increase include the UAE, Kazakhstan, Iraq, Kuwait, and the Saudi-Kuwaiti Neutral Zone many of which are investing in expanded capacity.

Conversely, U.S. supply faces mounting pressure. Rig counts have fallen to their lowest levels since November 2021 down 5.8% year-over-year due to rising operational costs, capital discipline, workforce shortages, and regulatory headwinds. These factors may constrain future output and limit the shale sector’s ability to respond to price shifts quickly.

Demand Trends and Macro Backdrop

Global oil demand is forecast to grow by approximately 800,000 b/d in 2025 lower than previous expectations. The revision reflects global economic softness, lingering inflationary pressures, and trade uncertainties that have impacted industrial and transportation fuel consumption.

From 2027 onward, demand is projected to plateau or gradually decline, as energy systems continue to transition toward renewables, electrification, and efficiency gains in both advanced and developing economies.

China remains a pivotal player. Although stimulus measures have been introduced to reignite growth, these have yet to produce a substantial uptick in oil consumption. The trajectory of China's industrial recovery and mobility trends will remain a key demand-side determinant.

Geopolitical and Policy Considerations

A backdrop of geopolitical risk and constrained supply has driven a three-week rally in oil prices, with Brent gaining more than 2% in a single week. These gains reflect the market’s sensitivity to security risks and supply bottlenecks, even as broader economic data remains mixed.

Most recently, renewed geopolitical escalation in the Middle East centered around intensified tensions has added fresh uncertainty to global oil markets. Although no major infrastructure disruptions have occurred thus far, heightened military activity near key transit routes, including the Strait of Hormuz, has raised concerns about potential supply chokepoints. This has contributed to short-term risk premiums in crude prices and underscored the region’s continued significance to global energy security.

The U.S. administration, focused on managing inflation, continues to prioritize lower energy prices, targeting crude levels around or below $50 per barrel. This stance places a ceiling on significant price gains in the absence of major supply disruptions.

While some trade tensions have eased particularly regarding U.S. tariffs broader macroeconomic uncertainty continues to exert a moderating influence on investor confidence and price momentum.

Trend Outlook and Analysis

The oil market in the second half of 2025 and into 2026 is expected to navigate a delicate balance between growing supply and a slower pace of demand growth:

• Price Stability with Risk of Volatility: Brent crude is expected to average around $66 per barrel for 2025 and ease to $58 in 2026. However, episodic volatility remains likely due to geopolitical risks, extreme weather events, or disruptions to shipping routes (e.g., the Strait of Hormuz or Red Sea).
• Supply Flexibility and Investment Hesitation: OPEC+ remains the most agile player in adjusting supply. However, political and fiscal pressures within member countries may test cohesion. Outside the bloc, U.S. shale producers remain constrained by capital efficiency mandates, limiting their ability to ramp up quickly in response to price spikes.
• Structural Demand Changes: The demand trajectory is increasingly shaped by structural shifts: EV adoption, alternative fuels, energy efficiency, and ESG mandates. While near-term demand still grows, the long-term curve flattens significantly pointing toward a more range-bound market unless new geopolitical or economic catalysts emerge.
• Speculative Positioning and Sentiment: Hedge funds and institutional investors have reduced net long positions in crude futures, indicating more cautious sentiment. However, a shift in macro sentiment or a major supply disruption could lead to a rapid resurgence in speculative inflows.

● Key Watchpoints for 2H 2025 and Beyond:

○ China's industrial and consumption recovery pace

○ U.S. Federal Reserve and global central bank policy impact on growth

○ OPEC+ strategic direction post-2025

○ Progress on global energy transition policies and implementation

○ Escalating Middle East tensions and their impact on transit routes and regional supply

Conclusion

The mid-2025 oil market reflects a nuanced and evolving landscape marked by expanding global supply, cautious demand growth, and external pressures ranging from geopolitics to economic uncertainty. While current prices are supported by short-term risks and production adjustments, the medium-term outlook suggests a stabilizing market environment, with Brent expected to remain in the mid-$60 range for the remainder of the year.

Volatility will persist, but strategic positioning, policy developments, and investment discipline especially in U.S. shale will determine how flexibly the market can adapt to both emerging risks and new growth drivers.

This article was written by Terence Hove, Financial Markets Strategist at Exness.

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Source: TUKO.co.ke