Energy Musings - July 21, 2025
Confusing economic data and tariff uncertainty have created a challenging market for oil. Near-term oil price support could evaporate rapidly if certain trends change or geopolitical events occur.
Today’s Challenging Oil Market
Oil prices continue to fluctuate around the $65 per barrel level, buffeted daily by geopolitical tensions, economic news, and fear of the latest tariff developments. The price still includes a small premium for Middle East tensions, as the future of Iran and its nuclear ambitions remains uncertain. Despite those issues, oil prices have not collapsed as forecasters had predicted, although fears of a collapse still overhang the oil market.
Daily oil prices are influenced by market supply/demand dynamics that currently support higher prices while anticipating lower prices further into the future. The near-term pricing dynamics are a function of consumption versus refinery output data. The imbalance between global oil supply and demand remains less of a factor in near-term dynamics because of the lag time between shifts in either trend.
However, suppose petroleum product consumption trends indicate near-term supply issues. In that case, prices will respond to prompt the industry to act to meet demand, just as declining prices signal to producers to stifle output to boost future prices.
According to market forecasters, global inventories currently reflect tightness in most regional markets. The global tightness has been driven by the Asia-Pacific region’s willingness to buy more crude oil and build its inventory. A chart from the most recent article from RBC Capital Markets’ oil team, headed by Helima Croft, shows how inventories have increased regionally year-to-date in 2024 and 2025.
Oil prices are at risk of slowing Asian demand.
As the chart shows, crude oil inventories in the Americas have increased only slightly, similar to those in the Middle East, North Africa (MENA) region. Europe’s 2025 inventories have increased more than those of the other two regions, but Asia-Pacific’s inventories have soared. The geographically unbalanced inventory data points to an oil price vulnerability should the Asia-Pacific region slow its inventory building. The conventional view is that unless China’s growth accelerates, price vulnerability will become a reality in months.
Croft and other forecasters anticipate a growing oversupply of crude oil in the fall and winter as global energy demand slows and supply continues to increase. Consequently, they expect lower oil prices to begin in the second half of 2025 and persist throughout 2026.
The chart below shows RBC’s 2025 and 2026 quarterly and annual supply, demand, implied inventory change, and WTI and Brent oil price forecasts. The strong demand growth during the third quarter of both years translates into minimal quarterly inventory builds. Traditionally, fourth-quarter demand is lower than third-quarter demand, resulting in a sharp build in inventories during the fourth quarter. That pattern is expected to recur again this year.
However, RBC’s economic outlook suggests even weaker oil demand in the first quarter of 2026 compared to the fourth quarter of 2025. Therefore, the supply/demand balance indicates a larger surplus and a larger inventory build in the future as RBC expects significantly higher oil supply growth in the fourth quarter of 2025 and for this growth to remain stable throughout 2026. The result of these dynamics is lower oil price forecasts for the winter quarters, which are expected to continue into 2026.
RBC sees weaker winter demand and lower oil prices.
RBC’s views on oil supply/demand dynamics and oil prices fit with the market’s consensus. We plotted the crude oil futures contract prices as of July 11. It shows backwardation of the curve – higher near-term and lower future prices. The near-term barrels are worth more than future barrels, which is consistent with weaker oil demand in 2026.
Oil prices indicate that near-term supplies are in highest demand.
Let’s examine the messages U.S. crude oil and petroleum product inventories are sending to the market. Weekly crude oil inventories, excluding those in the Strategic Petroleum Reserve, are in the lower portion of the 5-year maximum and minimum values, as well as below the 5-year average. This year’s weekly inventories have followed the historical weekly pattern, but they have been unable to narrow the gap with the 5-year average. Surprisingly, the gap between current and the 5-year average inventories has been increasing in recent weeks, which suggests that demand might be slightly stronger than oil companies anticipated. Then again, it may be that the supply is not as high as expected. Time will give us the answer.
Crude oil stocks remain tighter than in the past.
Gasoline inventories show a different pattern from crude oil. Gasoline inventories for the first four months of 2025 matched or exceeded the 5-year average. However, they began to lag such that by the end of May, when the Memorial Day holiday arrived, gasoline inventories were close to the 5-year minimum level, before rebounding during June.
Gasoline inventories appear adequate as summer’s demand peak has passed.
The explanation for lower gasoline inventories is that refinery margins were extremely low, discouraging oil companies from producing more gasoline and other petroleum products earlier in the year. When oil prices strengthened with increased Middle East tensions and then jumped with the outbreak of war between Iran and Israel, refinery margins improved. The margin expansion coincided with the need for increased gasoline supplies as the summer driving season approached its peak.
The economic data for the U.S. and its outlook have deteriorated since the beginning of the year. It currently reflects concerns of people pulling back on spending, especially for travel and large purchases. People are nervous about the impact of tariffs on inflation and their cost of living. However, the recent inflation data shows little effect from tariff costs, and retail sales and other economic data have been stronger than economists have predicted.
Surprisingly, air travelers have set multiple daily records this year, as reported by the Transportation Safety Administration. Eight of the 10 highest passenger screening days in TSA history have occurred this year, and we are barely past the mid-point. During the Fourth of July weekend, over three million passengers were screened on July 6th, and nearly that many on July 3.
AAA predicted record numbers of people traveling more than 50 miles from home over both the Memorial Day and the Fourth of July holidays. It appears both predictions proved accurate. So, how does this data square with forecasts that the economy’s health is deteriorating and people are growing less optimistic and cutting back on spending?
Although the crude oil and gasoline supplies appear to be sufficient, the troubled market is for distillate. This is diesel fuel and home heating oil. Distillate inventories began 2025 slightly below the 5-year average, but they quickly dropped to the bottom of the 5-year minimum/maximum range. In late May, current inventories fell below the 5-year minimum and remain there at mid-July. The deficit from the 5-year minimum is meaningful. It is concerning because distillate inventories need to rise during the third quarter to ensure adequate supplies of heating oil for the upcoming winter.
Heating oil use is localized to New England and specific areas within the Midwest and Mid-Atlantic regions. Unless there is a sharp reversal of the inventory situation, an early, cold, and long winter could spell trouble for homeowners in New England. A distillate shortage could also prove a challenge for the transportation industry.
The lack of distillate supplies would also be problematic for New England’s electricity ratepayers. During New England winters, natural gas volumes usually available for generating electricity in the region are diverted to home heating. This forces ISO-NE, the region’s grid operator, to rely on expensive imported LNG to offset some of the diverted gas, as well as to restart oil- and coal-fired power plants to ensure sufficient electricity. High distillate prices would further inflate the cost of winter electricity bills in New England. Supplies might not be available for the oil-fueled power plants that ISO-NE usually restarts.
Heating oil supplies in the Northeast may be at risk this winter.
Besides the uncertain outlook for oil demand, the global market is challenged by potential supply disruptions from the ongoing and new sanctions on Russian oil exports. Several analysts suggest that the 18th round of European Union sanctions on Russian oil exports will prove no more effective than the prior 17 rounds. The U.S. is imposing tighter sanctions on the shipping companies and traders that help export it, as well as on refinery buyers in India and China. Will these sanctions reduce the flow of Russian crude oil?
The supply situation could be further disrupted in the event of a hostilities outbreak in the Middle East. What those would entail and the responses of the participants will determine how disruptive they might be. We haven’t even considered the potential for heightened geopolitical tensions in the Asia region.
One additional point about global demand. In May, the International Energy Agency revised its historical demand estimates. The agency added 260,000, 330,000, and 360,000 barrels per day to its prior demand estimates for 2022, 2023, and 2024, respectively. In a world of 99-100 million barrels per day of consumption, these additions are minuscule. However, these additions remind us that forecasts based on historical data, which continues to change, reduce confidence in them. This may be particularly true for a forecaster continuing to predict a near-term peak in global oil demand. Historical data revisions suggest the IEA may be ignoring or underestimating the true underlying global demand trend.
As we enter the second half of 2025, there are numerous issues that could disrupt the global oil market. Any one of these supply and demand issues could invalidate the consensus view of oil market dynamics, drastically altering oil price forecasts. This uncertainty will make oil producers cautious about their spending, which will, over time, impact global oil supply. Depending on how drastically spending is restrained and where it is cut back, will determine the impact on supplies. It is going to be an interesting six months. Stay tuned and alert.