Oil prices surge amid sharp US inventory decline and geopolitical uncertainties

The global oil market experienced a notable uptick in prices this week, driven primarily by a significant reduction in US crude oil inventories that exceeded market expectations. This development has highlighted robust domestic demand in the world's largest oil consumer, even as broader concerns about potential oversupply loom on the horizon. West Texas Intermediate (WTI) crude futures reached $63.21 per barrel, while Brent crude advanced to $67.09 per barrel, marking multi-day highs following a rally of over 1.4% in the previous session. The catalyst was the latest report from the US Energy Information Administration (EIA), which revealed a substantial drawdown in commercial crude stockpiles for the week ending August 15, 2025.

This inventory reduction not only underscores healthy petroleum consumption but also occurs against a backdrop of persistent geopolitical tensions that could reshape supply dynamics. As traders digest these mixed signals, the market remains volatile, balancing short-term bullish factors with longer-term risks of excess production.

Inventory drawdown exceeds forecasts

The EIA data indicated that US crude oil inventories plummeted by 6 million barrels, far surpassing analyst predictions of a modest 1.3 million barrel decline. This marked the most substantial weekly drop since mid-June, bringing total stockpiles to 420.7 million barrels - about 6% below the five-year seasonal average. Such a sharp decrease signals vigorous demand within the US economy, particularly during the tail end of the summer driving season.

Several key metrics from the report reinforce this optimistic view:

These figures collectively paint a picture of a resilient US petroleum sector, where increased exports and steady refining activity are effectively draining excess supplies.

Sustained fuel demand amid seasonal peaks

Beyond crude oil, gasoline inventories continued their downward trajectory for the fifth straight week, decreasing by 2.7 million barrels to 223.6 million barrels. This ongoing reduction aligns with heightened consumer demand during peak summer travel periods, further bolstering market confidence. Distillate fuel inventories, including diesel and heating oil, also saw a decline, albeit smaller, emphasizing broad-based strength in fuel consumption.

US crude production edged higher by 55,000 barrels per day to 13.4 million barrels daily, approaching record highs. Despite this uptick in output, the combination of robust exports and demand has prevented inventory builds, demonstrating the market's capacity to absorb additional supply. Analysts note that well productivity improvements are likely to push US production to new peaks near 13.6 million barrels per day by December 2025, though this could moderate if prices soften.

Geopolitical pressures shape supply expectations

Oil prices are not solely influenced by US fundamentals; geopolitical developments continue to inject uncertainty into the market. Ongoing peace negotiations between Russia and Ukraine, potentially facilitated by figures like US President Donald Trump and Russian President Vladimir Putin, are under close scrutiny. Russia, the world's third-largest oil producer at around 9.05 million barrels per day, could see an additional 200,000 barrels daily re-enter global markets if a resolution is reached, though experts suggest this would have limited immediate impact on fundamentals.

However, stalled talks have kept a risk premium embedded in prices, as any escalation could disrupt Russian exports further. Ukrainian President Volodymyr Zelenskyy has signaled openness to discussions, but progress remains elusive, contributing to short-term price support.

Tensions between the US and Iran add another layer of complexity. Recent conflicts in the Middle East, including incidents in the Strait of Hormuz, have raised fears of supply interruptions, though markets have largely shrugged off these risks due to ample global spare capacity. Iran's involvement in regional disputes could potentially affect up to 20% of global oil transit through key chokepoints, but current assessments indicate minimal disruptions as of mid-2025.

OPEC+ actions and global supply dynamics

The OPEC+ alliance, led by Saudi Arabia and including Russia, has been gradually unwinding production cuts, boosting output by 548,000 barrels per day in August 2025. This move aims to capture greater market share amid stable prices, but it has prompted warnings from the International Energy Agency (IEA) about a looming supply glut. The group plans to fully phase out cuts by September 2025, a year ahead of schedule, potentially adding significant volumes to the market.

Global supply is projected to rise by 2.5 million barrels per day in 2025, outpacing demand growth and leading to inventory builds. Non-OPEC+ producers, particularly in the US, Brazil, and Guyana, are expected to contribute to this surplus, with overall production growth potentially creating a "bloated" market environment.

Demand forecasts and long-term outlook

The IEA has trimmed its 2025 oil demand growth forecast to just 680,000 barrels per day, the lowest since 2009 excluding pandemic years, driven by slower economic expansion in key regions like China. Non-OECD countries are anticipated to account for all net growth, while OECD demand remains flat or declines amid energy transitions.

Looking ahead, the EIA predicts crude prices could dip below $60 per barrel by year-end 2025 and average around $50 in 2026, influenced by rising supplies and moderating demand. However, if geopolitical risks escalate - such as prolonged Ukraine conflicts or heightened US-Iran frictions - this downward trajectory could reverse, maintaining elevated prices.

Market participants are navigating a delicate balance: current US inventory tightness supports near-term gains, but the unwinding of OPEC+ cuts and potential peace dividends pose downside risks. As summer demand wanes, attention will shift to winter heating needs and broader economic indicators.