Oil: War, wildfires and weak demand

Crude oil prices are once again caught between two conflicting narratives—tightening supply risks and weakening demand signals. As of Tuesday, Brent was hovering near $65 per barrel, having rallied nearly 3 percent since Monday. The bullish momentum is underpinned not by fundamental demand-supply imbalances, but by heightened geopolitical risk and constrained supply expectations.

The sharp escalation in the Russia-Ukraine conflict is pushing markets to reassess the risk premium on crude. The possibility that hostilities may soon target energy infrastructure, including Russian oil exports, has reawakened fears that had gone dormant in recent months. With Ukraine stepping up drone strikes and Russia intensifying retaliatory measures, the spectre of energy supply disruptions is no longer remote. A direct hit to Russian oil logistics—or even the credible threat of it—could upend already delicate global supply chains.

Adding fuel to the rally is Iran’s likely rejection of the latest U.S. nuclear deal proposal. According to diplomatic leaks cited by Reuters, Tehran is preparing a "negative response" to Washington’s terms, which would have required a halt to all uranium enrichment. The failure of negotiations all but cements Iran’s pariah status in oil markets. With U.S. sanctions still in place, Iranian crude will largely remain sidelined, with China continuing to be the only major importer of its discounted barrels.

Meanwhile, Canada’s oil sands are feeling the heat—literally. Wildfires in Alberta have reportedly taken about 350,000 barrels per day offline, or 7 percent of the province’s output. While the volume is modest in global terms, it adds to the bullish mix in a market hypersensitive to disruption headlines.

Ironically, the OPEC+ meeting over the weekend was itself a bullish trigger. The cartel and its allies chose to stick with a planned 411,000 barrels-per-day increase for July—smaller than many market participants feared. With expectations of a larger hike failing to materialize, the post-meeting relief triggered a short-covering rally. As ANZ’s Daniel Hynes noted, “investors unwound their bearish positions they had built prior to the weekend’s meeting.”

Yet, even as supply-side anxieties dominate headlines, demand-side realities offer a sobering contrast. China's oil demand—a major pillar of global consumption—has shown unmistakable signs of cooling. According to data highlighted by Energy Tracker Asia, China’s oil imports fell to a six-month low in April, reflecting sluggish industrial activity and refinery maintenance. Despite Beijing’s stimulus pledges, domestic economic momentum has yet to match expectations. With petrochemical margins squeezed and exports under pressure, refiners are dialling back on crude intake.

The contradiction couldn’t be starker: on one hand, geopolitical risk threatens to choke supply; on the other, the world's largest importer of crude is signalling demand fatigue. Add to that a weakening U.S. dollar, which mechanically boosts commodity prices, and markets are left with a volatile, sentiment-driven setup.

In the near term, the price direction of crude will be dictated more by geopolitics than by fundamentals. Any material escalation in the Russia-Ukraine war, particularly one targeting energy assets, could send prices surging above $70. Similarly, confirmation of Iran’s rejection of the nuclear deal could lock out nearly 1.5 million barrels per day from re-entering the market.

But lurking beneath the surface is the fragile state of global demand, especially from China. If industrial sluggishness persists and Beijing’s fiscal pump-priming fails to gain traction, demand projections for H2 2025 may need to be revised downward.

For now, oil sits at a precarious junction—geopolitical flames are fanning the bulls, but macroeconomic gravity may soon pull the rug from under them.