Bousso: The geopolitical premium of oil in the ROI vanished by 2025 and is unlikely to return.
In 2025, the global oil markets were faced with multiple black swans events - such as the Israel-Iran War and Ukrainian attacks on Russian refineries - but they were not fazed. In an age of abundant energy, this calm could be the new norm. The year 2025 will be remembered as a geopolitical chaos, due to President Donald Trump's return in January, and his frenzy of trade, policy and diplomatic initiatives. On June 12, Israel bombed Iranian military, government, and nuclear sites. This was a pivotal moment in the energy market. On June 22, the U.S. also joined in with "Operation Midnight Hammer," which targeted Iran's heavily fortified nuclear installations. Oil traders have long feared a U.S. attack on Iran. The Islamic Republic would retaliate if attacked by blocking the Strait of Hormuz in the Gulf, which is a narrow waterway through which almost a fifth of world oil and gas are transported. According to theory, the mere threat of a catastrophe would send oil prices soaring into triple digits. The 'crude oil volatility index' spiked to its highest level since early 2022 when Russian tanks first entered Ukraine. However, oil prices responded with remarkable calmness this time.
Brent crude futures, the global benchmark, rose from $69 per barrel on June 12 to $78.85 one week later. They then dropped rapidly to their prewar levels on June 24 when Israel and Iran agreed to a ceasefire mediated by the United States. Prices remained well below the 2025 peak.
JADED OIL MARS Oil futures in 2025 have fluctuated in a relatively small range, between $60 and $81 based on the daily closing values. The high was reached before the Organization of the Petroleum Exporting Countries started production increases.
This year, the range of prices is smaller than last year. Prices jumped from $70 to $130 in March 2021, two weeks after the start of the invasion, as Russia, the third largest oil producer on earth, began amassing its military forces along the Ukrainian border. Prices remained above the pre-invasion level for nearly a whole year. The rally in 2022 was mainly driven by the expectation that Western sanctions against Moscow would severely restrict its oil exports. However, these fears never materialized.
This may explain in part why prices have been less volatile this year. Prices barely responded to Ukraine's attack on Russian oil refineries in April. However, refining margins soared due to fears of diesel shortages. Trump's sanctions against Russia's two largest oil companies, Rosneft, and Lukoil (which together account for 5% global crude production) in October only led to a short-lived and limited price rise.
The reason the energy markets are so calm is simple: there's a lot of oil and natural gas floating around. The U.S. has led the increase in oil and gas supplies in the last decade. It is now the largest producer and exporter of both LNG and oil. In September, its crude production reached a new record of 13.84 million barrels a day (bpd), thanks to the growth of the Permian Shale Basin and the Gulf of Mexico. OPEC, Russia, Kazakhstan and other producers, collectively known as OPEC+ have also increased production throughout 2025, after reversing decades of production cuts aimed to support prices. Non-OPEC nations in the Americas – Argentina, Canada Brazil and Guyana – have also increased output. This robust growth in production is expected to lead to a massive surplus of almost 4 million barrels per day (bpd) by 2026. The oversupply could even extend into the next year.
The reason is that prices are still strong enough for U.S. producers and others to maintain, or even increase output. This is due to advances in drilling technology. OPEC+ also stated that it will continue to invest in expanding output capacity.
CALM DOWN BEFORE A STORM?
Complacency, however, could pose its own risk. Howard Marks of Oaktree Capital Management - the world's biggest distressed debt investor - famously stated that risk is greatest when perceived as lowest.
For energy markets to truly be shaken, there must be a real change in the physical volume. Geopolitical concerns are not enough in an age of abundant supplies.
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(source: Reuters)
