Energy Market Update – May

NAVIGATING CROSSCURRENTS

As we move through the second quarter of 2025, global energy markets are contending with a highly dynamic and uncertain backdrop. Trade tensions are intensifying, US monetary policy remains in flux, and OPEC+ supply management is evolving. These factors, combined with mixed macroeconomic signals and softening oil prices, are creating a fragile equilibrium in fuel markets. The balance between oversupply concerns and lingering geopolitical risks is increasingly delicate – making it a period defined more by optionality than conviction.

GLOBAL TRADE: TENSIONS PEAK, TALKS BEGIN

Markets responded positively to the announcement of a 90-day tariff pause between the US and China in early May. While far from a resolution, the move reflects a mutual recognition of the economic damage sustained by both sides. US Treasury Secretary Scott Bessent openly acknowledged that the effective trade embargo was “unsustainable,” with both sides now expected to pursue narrowly scoped purchase agreements and concessions around market access, rather than any sweeping trade reset.​

While a near-term tariff truce appears increasingly likely – particularly as inventories deplete and inflation risks rise – any economic recovery in global trade flows is expected to be gradual. However, the administration has signalled those nations offering early concessions – such as India, which is progressing toward a limited trade agreement – may be rewarded with exemptions from the baseline 10% tariff. Talks with the EU and Japan remain more contentious, and uncertainty still hangs over the broader global trading framework.

OIL MARKET FUNDAMENTALS: ERODING OPTIMISM

Since OPEC+ announced a planned 960kbd output increase from April to June, sentiment in the oil market has deteriorated. While intended to demonstrate confidence in demand and reassert market share, the decision may have overshot the fundamentals. So far, however, data from the IEA shows that actual barrels delivered to market have undershot expectations, with some member states struggling to deliver promised volumes. Still, concerns over oversupply linger, particularly as April US crude production dropped to 12.867mbd – down roughly 300kbd from January’s peak.​

A key reason behind the supply acceleration appears to be Saudi Arabia’s strategic pivot. After abandoning its effort to force higher prices, Riyadh is now prioritising market share – seeking to punish overproducing OPEC+ members like Iraq and Kazakhstan, as well as high-cost US shale producers, by increasing supply and allowing prices to ease. This approach comes at a fiscal cost, with Saudi Arabia’s budget breakeven near $95/bbl (and upwards of $115/bbl when accounting for external investments). Nonetheless, Saudi leaders appear willing to absorb near-term budget pressure to maintain influence in Asia’s fast-growing markets and preserve favour with Washington – underscored by President Trump’s recent visit to the Kingdom. Lower oil prices also help Saudi Arabia maintain good relations with Trump, who visited the Kingdom this week – although it is important to note, low prices hurt the Kingdom’s ability to bankroll the investments announced during that visit. The UAE, less vulnerable due to its sovereign wealth buffers, is similarly focused on market share and discipline within the group.

Despite the US production pullback, there is a broader sense that shale growth has structurally plateaued. Leading Permian operators continue to prioritise capital discipline over growth, cutting back on rigs and completions. With input costs rising – casing prices are up over 10% QoQ due to tariffs – many producers are dropping rigs, cutting capex, and focusing on shareholder returns over incremental barrels. These constraints are likely to keep US supply growth muted through at least Q3.​

​Meanwhile, Iran remains a geopolitical wildcard. Although recent headlines have hinted at the possibility of renewed US – Iran nuclear talks, given the time required to strike any nuclear deal, we do not expect a major revival in Iranian exports in May or June. The current administration remains ideologically opposed to re-entering the JCPOA framework and has instead opted for a containment strategy rooted in Gulf partnerships and regional balancing. ​

​Iran, for its part, continues to export crude to China via discreet channels and has adapted its crude slate to suit Chinese refiners. As a result, even a partial deal would be unlikely to unlock significant new volumes into the official market. Nevertheless, risks of regional flare-ups remain.​

​TECHNICAL ANALYSIS: BRENT

Brent continues to trade around $65/bbl, having tested the key psychological support level at $60/bbl in both April and May. On each occasion, it failed to close below this threshold, reinforcing its significance.

In the short term, prices are finding increasing support at the 13-day moving average. However, meaningful resistance remains at $65.62 – the 34-day moving average. A sustained break above this level could open the path toward the mid-April highs, with the next psychological target set at $70/bbl.

DEMAND SIDE: SLUGGISH BUT STABLE

The IEA has revised its 2025 oil demand growth upward to 740kbd for the year, from 720kbd previously. However, growth is expected to slow to 650kbd over the remainder of 2025, down from 990kbd in Q1, reflecting continued economic headwinds, a sluggish industrial recovery in China, and accelerating EV adoption.

Chinese crude import volumes remain robust for now, buoyed in part by buyers front-loading purchases ahead of potential renewed tariffs following the current truce. However, weak retail sales and real estate activity have prompted calls for fresh stimulus, although policymakers have been cautious. Key data points released mid-May will be watched for signals of credit easing or fiscal intervention. Any policy shift could influence commodity flows, particularly in industrial fuels.

In the US, distillate inventories remain extremely tight – currently at their lowest seasonal level since May 2008. While this could offer price support for middle distillates in the short term, broader demand remains sensitive to trade activity and industrial throughput. The Federal Reserve, meanwhile, held rates steady at its May meeting, citing increased uncertainty. Fed Chair Jerome Powell reiterated that the central bank is prepared to “look through” tariff-driven price pressures in favour of preserving employment should stagflation risks rise. Markets are now pricing in two rate cuts in the second half of the year, with core inflation and employment data holding the key to timing.

Refinery margins continue to support product markets, with strong fuel oil, gasoline, and distillate cracks pushing European straight-run margins to over $3/bbl and complex configurations to $6.50/bbl. Despite macroeconomic softness, refined product demand has remained resilient relative to crude. Low global stocks, unplanned outages, and lower-than-expected refinery runs have contributed to margin strength.

As refineries return from maintenance and ramp up for peak driving and holiday season demand, crude runs are expected to increase, supporting stronger crude spreads and gradually firming flat price levels into Q3.

LOOKING AHEAD – FRAGILE STABILITY

All eyes are now on the June 1 OPEC+ ministerial meeting, where delegates will reassess the impact of recent production increases. Should global growth disappoint or should trade frictions reignite after the current tariff truce, the group may roll back its output gains – much like during the 2008/09 recession, when cuts helped double prices from the lows. Market participants will also closely monitor US – China talks, stimulus measures in China, and continued positioning by key shale producers.

CFTC data shows that speculative positioning has been cut significantly in recent weeks. When assessed against global inventory levels, positioning now appears overly bearish. Historical correlations suggest that at current stock levels, Brent would typically be priced ~$10/bbl higher, reinforcing the idea that markets may be under-pricing potential upside.

With key benchmarks testing support levels, energy markets remain delicately poised. The balance of risks suggests that while short-term volatility will persist, much of the bearish sentiment has already been priced in. Further price movement may prompt some market participants to review their exposure and consider whether current levels align with their existing risk management strategies.

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