Oil prices rise on supply concerns as US tariffs limit gains

[WORLD] Oil prices surged on February 12, 2025, amid concerns over global supply disruptions, but the gains were moderated by the potential impact of new US tariffs on economic growth and oil demand. Geopolitical tensions, particularly in the Middle East, along with sanctions on Russian and Iranian oil exports, sent global benchmarks like Brent and West Texas Intermediate (WTI) crude higher. However, the imposition of tariffs by the US government on steel and aluminum imports created uncertainty around global economic conditions, weighing down the full extent of oil price hikes.

The Surge in Oil Prices

On February 12, 2025, global oil prices witnessed a significant surge, with Brent crude futures rising by 1.5%, or $1.13, to $77.00 per barrel. Similarly, US West Texas Intermediate (WTI) crude climbed by 1.4%, or $1.00, to $73.32 per barrel. This marked the highest prices for both crude benchmarks in two weeks, driven by growing concerns about oil supply disruptions and market tightening.

Supply Concerns Driving the Rally

The climb in oil prices was largely triggered by supply-related issues. Market participants are particularly concerned about the stability of oil supplies from major producers, including Russia and Iran. Both countries have faced ongoing challenges due to sanctions, which have limited their ability to export oil to key global markets, including China and India. This supply squeeze has prompted a tightening of the market and led to upward pressure on prices.

"With the US bearing down on Iranian exports and sanctions still biting into Russian flows, Asian crude grades remain firm and underpin the rally from yesterday," said PVM Oil Analyst John Evans. The effects of these sanctions have resulted in reduced availability of crude oil on the global market, particularly in key regions that are major oil consumers.

Geopolitical Tensions in the Middle East

The geopolitical situation in the Middle East has also contributed to the rise in oil prices. The Middle East remains a critical region for oil production, and any instability or conflict in the area tends to have an outsized impact on global oil markets. Recently, the Israeli Prime Minister Benjamin Netanyahu’s remarks on the potential collapse of the Gaza ceasefire sparked fears of renewed conflict, further exacerbating worries about the safety of oil shipments from the region.

Historically, such tensions in the Middle East have had significant repercussions on oil prices. Any disruption in the flow of oil from this region can send shockwaves through global supply chains and cause prices to spike. As the Middle East continues to play a vital role in global oil production, such political and military tensions remain a critical factor for market participants to monitor.

US Tariffs and Their Impact on Oil Prices

While oil prices saw significant gains in response to supply concerns, these were tempered by fears about the economic ramifications of new tariffs imposed by the US government. President Donald Trump’s decision to impose higher tariffs on steel and aluminum imports has led to market uncertainty, as these measures are seen as potentially weighing down global economic growth. Higher tariffs on imports could spark retaliatory actions from trading partners, leading to a possible trade war that could affect global energy demand.

Analysts have expressed concerns that the tariff measures could negatively impact the oil market in the long run. Morgan Stanley analysts noted that "tariffs and counter-tariffs have the potential to weigh on the oil-intensive part of the global economy in particular, creating uncertainty over demand." This view suggests that an escalation in trade tensions could slow economic activity, reducing the demand for petroleum products across the world. Oil-intensive sectors, such as transportation and manufacturing, could feel the effects of higher costs, ultimately leading to reduced consumption of oil.

US Federal Reserve and Economic Growth

In addition to concerns over tariffs, the Federal Reserve’s stance on interest rates is also a key factor weighing on oil price movements. The central bank's decision to raise interest rates in an effort to curb inflation has introduced further uncertainties into the global economy. Higher interest rates tend to dampen economic activity by increasing borrowing costs, and this, in turn, can lead to weaker demand for energy products, including oil.

As oil prices are highly sensitive to global economic growth, any slowdown in economic activity resulting from higher interest rates or a trade war could put downward pressure on oil prices. For oil producers and market participants, the possibility of reduced demand is a significant concern, and it has led to a more cautious outlook for the near-term future of oil prices.

Outlook for Global Oil Supply and Demand

Despite the challenges posed by geopolitical instability and tariff measures, the long-term outlook for oil remains relatively positive. The global oil market is expected to see continued growth in both supply and demand in the coming years. According to the US Energy Information Administration (EIA), global oil supply is projected to increase to 104.6 million barrels per day (bpd) in 2025 and to 106.2 million bpd in 2026, up from 102.8 million bpd in 2024. Similarly, global oil demand is expected to reach 104.1 million bpd by 2025, driven by the growing consumption of oil in developing economies.

This projected increase in global oil supply and demand indicates that while there may be short-term fluctuations in prices, the long-term trend points to a tight market, with supply and demand remaining in balance. However, key risks such as geopolitical instability, trade tensions, and the economic impact of tariffs will continue to influence oil prices in the short term.

Impact of Sanctions on Russian and Iranian Oil

The ongoing sanctions on Russia and Iran have been a critical factor in the oil market's tightening. These sanctions have not only disrupted the supply chains from these countries but have also led to a shift in trade patterns, with key customers such as China and India increasingly turning to other oil suppliers. As a result, oil prices in the Asia-Pacific region have remained elevated, supporting global oil prices as a whole.

The sanctions have effectively forced Russia and Iran to look for alternative markets and strategies to mitigate the effects of the export restrictions. However, with limited options for increasing exports to other markets, these countries are facing significant challenges that are expected to continue affecting global oil supply dynamics.

The Role of OPEC in Balancing Supply and Demand

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, have played a critical role in managing the balance between oil supply and demand. OPEC's efforts to control production levels and stabilize prices through coordinated output cuts have had a significant impact on oil market stability. In the face of uncertainties such as sanctions on key producers and trade tensions, OPEC's policies will continue to be important in determining the future trajectory of oil prices.

As OPEC works to balance supply with demand, the group is also facing challenges related to non-compliance among some member countries and the growing influence of non-OPEC producers. Despite these challenges, OPEC's decisions will continue to shape global oil market conditions and influence price movements.

Oil prices have been climbing in response to concerns over global supply disruptions, driven by sanctions on Russian and Iranian oil exports, as well as rising tensions in the Middle East. However, these gains have been tempered by worries about the potential impact of new US tariffs on global economic growth and oil demand. While short-term uncertainties persist, the long-term outlook for oil remains positive, with global supply and demand expected to increase in the coming years.

The future of the oil market will be shaped by a complex interplay of geopolitical risks, economic policies, and production decisions by key players like OPEC. As market participants continue to navigate these challenges, oil prices are expected to remain sensitive to both supply-side factors and demand-side uncertainties.