Analysis: oil caught between geopolitical forces as experts see volatile market
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The oil market currently sits between two distinctive scenarios, involving the growing supply risk from Venezuela, and prospect of a peace deal between Russia and Ukraine.
On one hand, the prospect of a potential peace agreement in the Russia and Ukraine war could see sanctions on Russian oil disappear quickly.
This would then be available to the market, dragging down prices.
However, US President Donald Trump’s order to block sanctioned oil tankers entering and leaving Venezuela adds another layer to the situation.
According to analysts, unless there is more clarity regarding the potential peace deal between Russia and Ukraine, the oil market is likely to remain volatile and sensitive.
Brent crude oil prices dropped below $60 per barrel this morning, a first in over seven months.
Concurrently, the West Texas Intermediate price closed on Monday at its lowest point since February 2021.
“Selling pressure is being generated by new hopes for an end to the war in Ukraine in the near future and the accompanying easing or lifting of US sanctions against the Russian oil sector,” Carsten Fritsch, commodity analyst at Commerzbank AG, said.
Russian oil stored in tankers would then find buyers more easily and the mutual attacks on energy infrastructure would cease.
More Russian oil?
A ceasefire would likely lead to a relatively quick lifting of US sanctions on Russian oil companies, though the removal of European sanctions is expected to be more gradual, according to Jorge Leon, head of geopolitical analysis at Rystad Energy.
Furthermore, the cessation of hostilities would also mean the end of attacks on Russian oil infrastructure, he said in an emailed commentary.
This would significantly reduce the risk of near-term Russian supply disruptions and allow a sizeable volume of Russian oil currently stored on water (estimated at almost 170 million barrels) to return to the market.
The prospect of a Russia-Ukraine ceasefire will certainly intensify the downward pressure on oil prices, according to experts.
“As our oil balance shows, the peak of the surplus is expected in the first quarter of 2026,” Warren Patterson, head of commodities strategy at ING Group, said in a note.
However, with every quarter of next year in surplus, inventories should grow throughout 2026, putting further pressure on oil prices.
Source: Rystad Energy
OPEC conundrum
Should sanctions be lifted, incentives within the OPEC+ alliance would shift, Rystad Energy’s Leon said.
This would increase the likelihood of the group returning to a market-share strategy following the scheduled pause in the first quarter of 2026.
“Russia would be able to continue increasing production, and the discounts on Russian barrels would likely narrow as trade flows normalize.
But another point of view suggests that OPEC production quotas may not let Russia produce so much oil even with relaxed sanctions.
“We have already emphasized several times that a significant expansion of oil supplies from Russia is unlikely because Russia is bound by OPEC+ production targets and is already producing close to its own capacity limits,” Commerzbank’s Fritsch said.
Therefore, the current price weakness appears to be excessive.
Venezuelan supply risks
While Russian supply risks are widely known, there are also significant, though less discussed, risks to the Venezuelan oil supply, both of which pose a threat to the outlook.
Oil prices, specifically WTI, are up approximately 1.6% in early-morning trading.
This rise follows Trump’s order to block sanctioned oil tankers moving in and out of Venezuela.
This follows the US seizing an oil tanker off the coast of Venezuela last week.
In November, Venezuela’s oil exports totaled approximately 600,000 barrels per day.
“It’s likely that these volumes will fall given the latest developments. The bulk of this oil is shipped to China,” ING’s Patterson said.
At the time of writing, the price of WTI crude oil was at $56.06 per barrel, up 1.6%, while Brent was also 1.6% higher at $59.86 a barrel.
On Tuesday, Brent prices had fallen below the $60 per barrel mark for the first time in more than seven months.
Prices are likely to be governed by current fundamentals in the market as experts urge investors to remain cautious.
“Over the past year, markets have come close to pricing in a peace deal several times, only for talks to stall. As a result, while the current optimism is clearly weighing on prices, its durability will depend on tangible progress toward a credible and lasting agreement,” Leon said.
Until then, markets are likely to remain highly sensitive to political headlines.
