Oil Market at a Crossroads: Geopolitics and Shifting Demand
As the world's largest oil importer, China significantly influences the global oil market. Recent declines in China’s oil imports—its first yearly drop in over two decades—are driven by factors such as rising electric vehicle adoption and a real estate crisis affecting diesel demand. These changes, alongside geopolitical and market dynamics, highlight the complexities of the oil market.
China is the largest net importer of Oil
China’s demand for oil is important for the global market as it is the largest importer of oil in the world. Therefore, the activity in the country serves as a temperature gauge for understanding where the market is heading. In November/December 2024, China’s oil imports decreased, marking the first yearly decrease in over two decades, excluding the pandemic years. The reason for the low demand stems from several factors, including a rise in electric vehicles, which consequently decreases the demand for fossil fuels, and an ongoing real estate crisis that impacts diesel consumption in the country.
We have seen a backwardation in the market structure for oil, which means that current oil prices are higher than future prices. This indicates a tight market with current demand exceeding current supply. It implies that investors are willing to pay more for immediate rather than future delivery, which can indicate low inventory levels or higher demand.
Geopolitics
In addition, geopolitical tensions directly influence the price of oil due to the location of supply. While investors were expecting prices to decrease following the ceasefire deal between Israel and Hamas, this did not fully occur. Perhaps the reason for this is not only the risk that the deal could fail but also the dire scenario of an escalation of the conflict between Israel and Iran. Apart from the immense negative effects such an escalation would entail, for oil, Iran is an important supplier, and thus a distortion in the supply chain would have a direct effect on prices. According to Bloomberg, such disruptions could decrease the global production of oil by 1 million barrels per day, sending prices above $150 per barrel.
The US
Furthermore, as Donald Trump is now in office, many expectations rest on his shoulders regarding his ability to find a solution to Russia’s war on Ukraine. The initial plan to find a deal even before taking office is not materializing. However, perhaps unsurprisingly but nonetheless significant, Trump sent an ultimatum to Russia, offering an easy or hard route. While the global and humanitarian impact of this is clear, it also indirectly affects the price of oil. In the scenario of the "hard way," a potential response on top of the sanctions already imposed could involve extending the policy of “drill, baby, drill” to flood the market with oil, thereby reducing the price of oil and Russia’s income to fund the war. Perhaps the U.S. does not have the realistic possibility to achieve such an outcome alone, but together with OPEC—estimated to have around 5 million barrels per day in spare capacity—such a strategy could be plausible.
The global oil market is at a crossroads, facing challenges from shifting demand patterns, geopolitical tensions, and policy uncertainties. While backwardation in market structure and potential supply disruptions hint at tighter conditions and rising prices, the future remains unpredictable. Factors such as China’s evolving energy landscape, the geopolitical ripple effects of conflicts, and strategic decisions by key players like the U.S. and OPEC will shape the trajectory of oil prices. Given the many factors affecting the price of oil, the future is uncertain, but it is likely to create opportunities for both short-term and long-term investors.
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