Market Minute: Oil Markets Preparing for War?

Energy markets have attempted a modest recovery after WTI crude briefly plunged to $55.12 earlier this month following the volatility surrounding “Liberation Day.” But with the current global economic backdrop, can prices truly stabilize for long?

On Wednesday, Reuters reported talk that OPEC+ is considering another production increase — despite ongoing volatility in energy prices and growing concerns about global economic growth. If true, this move would be puzzling and reminiscent of the 2014–2015 shale oil boom-and-bust cycle. Back then, OPEC ramped up output to squeeze U.S. shale margins, discouraging domestic producers from expanding production due to reduced profitability. That strategy significantly impacted the U.S. oil sector, leading to widespread shutdowns, particularly in the Permian Basin and Eagle Ford regions, ultimately ceding market share back to Middle Eastern producers like Saudi Arabia. We could be witnessing the early stages of a similar dynamic — or perhaps something even more severe is on the horizon.

Oil prices have rebounded recently, in part due to short covering by Managed Money traders, as indicated by the CFTC’s Commitment of Traders Report. Despite the broader volatility, refining margins have held up surprisingly well. The classic 3:2:1 crack spread — a basic measure of refining profitability — is currently hovering around $25, the highest level since July 2024. This resilience is partially the result of U.S. distillate inventories (including diesel and fuel oil) sitting at their lowest seasonal level since 2008, according to the EIA.

This lack of inventory presents a double-edged sword: any fundamental increase in demand could trigger a sharp price spike. At the same time, it reflects broader recessionary pressures within the U.S. transportation sector and weak global export demand.

Now for the more ominous scenario: OPEC+ may be preparing to boost production as a preemptive hedge against potential disruptions in Iranian oil exports. At first glance, this may seem unlikely — but when viewed in the context of rising geopolitical tensions in the Middle East and the escalating U.S.-driven tariff-based “trade war,” it becomes more plausible. Countries around the world may be bracing for a dramatic shift in global supply chains, including energy.

Given the current divergence between price action and underlying fundamentals, caution is warranted. A clear disconnect has emerged in the oil market — and the road ahead may be far more turbulent than it appears.