Oil Prices Are Fairly Valued, for Now

US total crude and petroleum inventories began 2025 at fairly constructive levels, below their respective 2023 and 2024 equivalent and below the five and 10-year seasonal averages.

The current state of global inventories does not warrant the type of pessimism that was so prevalent in Q4 of 2024.

However, this dynamic alone is not enough to drive prices higher. We still need to see draws, particularly when we had the kind of bearishness in the market of late.

That is exactly was has occurred over the past few weeks, headlined by greater than normal crude draws.

Crude oil inventories tend to be flat through the first few weeks of the year, while gasoline and jet fuel tend to build as a result of the cold weather and reduced vehicle and aircraft usage as a result.

Overall, the trend in inventories has been very bullish over the past six months, and only just recently have the fundamentals come to the fore and prices reacted accordingly. The recent rally has thus removed the discount in the oil price relative to inventories that came into the market in Q4 last year.

Oil prices are now fairly valued, so for the price to continue to move higher in the short-term, we need to see continued inventory changes below seasonal norms given the market still anticipates a surplus in the market in 2025. This can be in the form of smaller than normal builds, or larger than normal draws.

Such an outcome was not present during this week’s EIA inventory report, giving traders little reason to bid prices higher.

For now, demand continues to hold back oil, particularly as it relates to the Big 3 refined products.

That gasoline and jet fuel demand has started 2025 strong than 2023 and 2024 when the weather has been colder this year is positive. But conversely, heating demand for propane has been lackluster given the colder weather. Distillates demand is also lackluster as a result of below average growth in the US and global manufacturing/industrial economy.

This in turn is holding down refining margins. We only saw a modest rise in distillate cracks amidst the recent rally in crude, and one which was short lived at that. Gasoline cracks didn’t budge.

We need to see refining margins rally alongside crude on a more sustainable manner for oil prices to reach $90. That is unlikely until we see a pick-up in economic activity.

The improvement in Singapore gasoil cracks over the past few months has been a positive, perhaps suggesting Chinese oil demand is starting to turn the corner.

A notable tailwind no longer present is the positioning. The ultra-bearishness of late Q4 2024 has largely been unwound, particularly in Brent, RBOB and distillates. While positioning is not yet at outright bearish levels from a contrarian perspective, positioning asymmetry is now neutral as a large portion of the oil shorts have been unwound.

As a result, my tactical oil model has shifted back to neutral levels. Which is how I view the immediate outlook for oil prices from a fundamental perspective. It is really only physical market indicators and momentum flashing bullish signals at present.

I suspect we will see WTI trade back to the low $70s, at which point I would look to get tactically long again, particularly if it is accompanied by a rebuilding of bearish positioning.

I don’t see much downside beyond $70 for WTI, especially once seasonality starts to turn much more favourable.

Summary & 2025 Outlook

• Oil prices are likely to spend most of the year in the $70-$80 range, a trader’s market. Long-term bulls should use moves to the lower end of this range to buy into their favourite stocks.
• Demand is the big question mark for 2025. An upside surprise in demand (particularly from China) is what will push prices to $90, if only briefly.
• We aren’t likely to see any upside surprises in supply. Supply is more likely to surprise to the downside than the upside, both from non-OPEC+ (US & Brazil), and OPEC+ (potential further delay of the eight-member voluntary cut unwinds should prices continue to hover around the low $70s).
• This should lead to projected surpluses be revised lower, particularly as we move through Q1 and expected inventory builds to not occur.

Bullish Developments

• Kazakhstan, Russia and Iraq compensating for their previous overproduction increases OPEC+ unity and reduces the risk of a price war within OPEC+.
• The delay of unwinding 2.2 million b/d in voluntary cuts, and longer period in which they are being unwound (April 2025 to Sept 2026). The slower pace of cut unwinds should be easily absorbed by the trend in demand growth.
• The impact of the 2.2 million b/d eight-member voluntary cut unwinds from 2Q25 is overstated. Iraq, Russia and Kazakhstan have been overproducing, and their production quota increase is based on their baseline levels, which they are only now adhering too. As the actual production increase from Q2 is small, once we account for their compensation of reducing production below their current quota to account for previous overproduction, the net increase in supply is minimal.
• UAE also delayed its production increase by three months, and is now to be phased in over 18 months, instead of nine.
• OPEC+ production cuts have not translated into commensurate declines in crude exports. However, this could be a result of an increase in Middle East refinery capacity, and thus an increase in petroleum product exports at the expense of crude exports. Non-seaborne exports are also not captured in headline OPEC+ export data
• Paper balances for 2025 are heavily skewed towards surpluses, meaning the market is susceptible to upside surprises in demand/downside surprises in supply.
• Non-OPEC+ production growth continues to disappoint, especially in the US.

Bearish Developments

• Enforcement of Iranian sanctions could be bearish for the market. Trump is likely to only enforce sanctions if OPEC+/Saudi agrees to increase production, and he will not be able to effectively keep Iranian oil off the market.
• Stagnant global economic growth, particularly in China. China is still yet to announce sufficient stimulus to spur economic growth, while leading economic indicators are yet to inflect higher.

What to watch

• Inventory changes in Q1 will determine much of the direction of oil for the year. Consensus is expecting a big surplus.
• Iraq and Kazakhstan compensation for recent overproduction.
• Chinese stimulus and Chinese leading economic indicators. Any upside surprises in Chinese economic growth will again remove much of the paper surpluses most expect for 2025.