Sushma Ramachandran

Global fossil fuels were at the heart of the discussion on environmental issues at the COP 29 conference in Baku. But there may be little incentive to shift away from them towards renewables in the short run given the decline in crude oil prices over the past few months. This development is bound to be welcomed by emerging economies like India which are big importers.

The fluctuations in oil markets will be determined largely, however, by geopolitical tensions as well as the state of the Chinese economy for the coming year. In the short run, it looks as if prices will continue to remain depressed.

The Organisation of Petroleum Exporting Countries (OPEC) thus looks set to continue existing curbs on output. These could were originally to be eased from January but the deadline could be moved to mid-2025.

Donald Trump's return as U.S. President may also make a difference to oil markets but not as much as has been touted. His much-quoted comment about planning to boost oil drilling - “drill baby drill” - has been interpreted to mean that U.S. oil companies will step up production to bring down gasoline costs, a key campaign pledge of the president-elect. The promise may end up being difficult to fulfill, given that the fossil fuel companies backing him do not want to create a situation that accelerates the softening of global oil prices.

Prices of the benchmark Brent crude had risen slightly in the past few days to about 74 dollars per barrel primarily due to geopolitical tensions especially the latest escalation in the Russia - Ukraine war. The ceasefire agreement between Israel and Hezbollah has eased market conditions and Brent crude is now at 72.61 dollars with West Texas Intermediate at 68.46 dollars. For the past few months, crude has been hovering in the range of 70 to 74 dollars, the lowest ever since the Ukraine-Russia war began in February 2022.

If Trump implements his plan to push higher oil output in the U.S., world prices could fall to even lower levels. However, the US energy companies are not keen to raise production. Their mandate is to make profits. Even the chief executive of ExxonMobil, the largest U.S. oil company, is reported to have expressed skepticism over Trump’s enthusiasm for more drilling. For these energy majors, it makes more sense to restrict output and ensure stability in prices.

Their interests in a Trump presidency would be easing regulations on climate change and liberalization in policies allowing fracking on government-held land. Even in the latter case, it would take a long time for oil fields to be set up in such areas.

On the other hand, the recovery of China’s economy could have a much greater impact on the oil markets. The fiscal stimulus announced recently by that country’s government has so far not been viewed with much enthusiasm though it may help in long-term recovery. Yet oil demand is expected to remain weak.

A major cause is the weakening of fossil fuel consumption due to the creation of renewable energy capacities along with the electrification of the transport system. China is one of the biggest consumers of electric vehicles currently and this has gradually reduced its huge appetite for crude oil and natural gas. The continuing construction and real estate slump has added to the decline in demand for petroleum products. The prospect of heavy tariffs being imposed by the new Trump administration is another reason for oil consumption likely to be muted next year.

The International Energy Agency has declared that Chinese oil demand is firmly in contraction, falling by 1.7 percent year on year in July, a marked contrast with the 9.6 percent average growth in 2023. It thus expects annual growth of only 1.1 percent in 2024, while demand may remain weak in 2025.

An equally critical factor in determining oil prices will be geopolitical developments. The Israel-Hezbollah ceasefire, for instance,  has already led to the softening of global prices as peace in a part of West Asia means that oil and gas output can continue without disruptions. Any expansion in the conflict with Gaza would create price volatility yet again. As for the recent ramping up of hostilities between Russia and Ukraine, these had sent ripples through oil markets. For the time being, however, Russian crude supplies which are essential for stability in world oil markets are continuing without any interruption.

The energy cartel, OPEC is holding meetings with allies like Russua to coordinate its strategy for the next few months. So, its earlier plan of reducing output to make members earn higher revenues will happen. Goldman Sachs has predicted that the production cuts in place will continue up to April. In fact, it felt that the OPEC Plus group - the cartel along with its allies - is working together to ensure stabilisation of prices. 

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Global oil markets thus look set to remain in bearish mode over the next year. This is good news for India, which is the third-largest oil importer in the world. If it continues till February, the oil import bill for the current financial year is likely to be much lower than the 121 billion dollars recorded in 2023-24. This will give the Finance Ministry some leeway in formulating the budget proposals. At the same time, it has to remain alert that the continuing tensions in conflict zones could play a spoiler. Much will depend on the geopolitical challenges as far as the outlook for oil markets is concerned in 2025.