Why Aren't Oil Prices Higher?

While the US and Israel attacked Iran, US President Donald Trump also had to worry about rising oil prices just as the US driving season was starting.  WTI peaked at $73.84 after the attacks on Iran then subsided to $65.74. The short-term trend returned to its status before the US strikes on Iran.  WTI bottomed out at $64.37 on 24 June before advancing to $66.54 at 10:00 BST on 04 July. At the time of writing this on 9 July, WTI is $68.65.

The increase has been blamed on Iran withdrawing cooperation with the IAEA inspection regime of its nuclear facilities. Technical analysts suggest that this is a breakout from the trend and could lead to prices as high as $73 a barrel. However, one can find sub-$50 barrel scenarios based on weak demand growth and trade tariffs.

No scenario survives first contact with reality, but the spread indicates the uncertainty in the markets, mostly a consequence of increased geopolitical risk. Analysts and futures markets suggest a WTI price range for Q3 of $60 to $67 per barrel, which will be good news for central bankers because oil is not likely to be inflationary, unlike Mr Trump’s trade and fiscal policies. 

As oil price volatility increased in June, President Trump, perhaps overestimating his ability to influence markets, posted on his own social network: “EVERYONE, KEEP OIL PRICED DOWN. I’M WATCHING! YOU’RE PLYAING RIGHT INTO THE HANDS OF THE ENEMY. DON’T DO IT!” He did not identify the enemy; perhaps he meant the Chairman of the Federal Reserve.

On 30 June, President Trump called for an immediate increase in US oil production, posting on his own social network: “To the Department of Energy: DRILL, BABY, DRILL!!! And I mean NOW!!!” A pity that the DofE does not operate the wells, or that Mr Trump does not seem to know this.

The main reason that oil markets have not spiked and caused a rise in inflation is that there is currently an oversupply of mineral oil. Add in the increasing quantities of biofuel and the increase in electric vehicle take-up and prospects for oil prices look distinctly bearish. The only thing keeping prices where they are now is a political risk premium. Yet traders report that there has been no significant interruption in global oil supply, which remains sufficient to meet global demand with some to spare.  The top three oil producers: OPEC+, Russia, and the US, are all operating at full whack.

When OPEC met on 6 July, the cartel was expected to confirm a 411 k bpd increase in output for August, In the event, seeking to support market share, the meeting concluded with a 548 k bpd increase for August. A similar increase for September seems likely, fully rewinding the 2.2 Mn bpd of cuts that were imposed over two years ago.

A 7 July note from ING Bank contains a typical reaction: “We still expect Brent to trade down towards $60/bbl by year-end amid expectations the group will increase supply again in September. A more bearish supply outlook, combined with demand uncertainty, doesn’t bode well for prices. The latest supply-increase announcement comes at a time when there’s increased uncertainty on the trade front with the Trump administration’s deadline for the 90-day pause in reciprocal tariffs ending on 9 July.”

Russian seaborne oil shipments are at lower levels in June and July than in April and May at around 3.2 Mn bpd according to Bloomberg, with reductions in output from Novorossiysk and Murmansk offsetting gains from Primorsk and Kozmino. Despite the Ukrainian drone campaign, Russian refinery runs of 5.33 Mn bpd in the first 25 days of June were 130 k bpd above the same period for 2024.

Revised EIA data show that the US produced a record 13.47 Mn bpd of crude oil in April, up from 13.45 Mn bpd in March. The EIA had previously estimated US oil output at 13.49 Mn bpd in March. On 8 July, the EIA reported that it has reduced its forecast of US oil production in 2025 from 13.42 Mn bpd to 13.37 Mn bpd. The cause is low prices which have reduced drilling activity. The EIA has previously predicted that US oil production would peak this year or next.

Despite the recent increase in prices, the total rig count in the US (including gas as well as oil rigs) has fallen from over 570 in April to 539 by 3 July with active oil rigs numbering 425, down by 13 in the last two weeks. Estimates of new shale wells being struck in the week to 27 June were 179, the lowest in four years. The EIA may be onto something.

So, oil markets are fully supplied and that's why prices are not rising further despite geopolitical tensions and open conflicts in the Middle East and Europe. Mr Trump may not have brought peace to the Middle East or to Ukraine, but the world's oil producers have heeded his message to drill, baby, drill. Perhaps this technique could be applied to diplomacy: to create the conditions for peace in the Middle East, maybe Mr Trump should declare a truce with Canada and Mexico...

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