(Editor's Note: In this series of articles, we answer the pressing Questions That Matter on the uncertainties that will shape 2025—collected through our interactions with investors and other market participants. The series is aligned with the key themes we're watching in the coming year and is part of our Global Credit Outlook 2025.)

Sustained high prices would be a challenge for many issuers, but physical oil market fundamentals look soft into 2025.

How This Will Shape 2025

Oil prices have been falling, and we expect them to stay contained in 2025.   But commodities markets can be highly unpredictable, and conflicts involving major crude-producing nations or close to oil-transporting facilities typically add a risk premium to prices. This is especially true when the Middle East is involved, given that the region contributes one-third of the world's crude oil production. Despite the escalating conflicts, oil prices have fallen in the second half of 2024—and both futures and our price assumptions point to moderately lower prices next year. S&P Global Ratings' base-case price assumption is that Brent oil prices will average $75 per barrel in 2025, compared with the average of $82 per barrel in 2023 and roughly $80 per barrel in 2024.

Oil supply remains a key factor for prices as demand growth looks to moderate.   An important factor for oil prices through 2025 will be the rate at which OPEC+ countries increase their supply. OPEC+ countries (led by Saudi Arabia) have been holding back supply, totaling 5.8 million barrels per day (bpd). After planning to start unwinding 2.2 million bpd in cuts in October and release more production, OPEC+ delayed this extra supply to year-end. This represents an overhang for the market as demand looks likely to be already met by new production from the Americas.

Demand for oil remains resilient, even as the energy transition slowly advances.   S&P Global Ratings expects moderate demand growth of above 1 million bpd in 2025, compared with an average of 1.7 million bpd for the past decade. This is correlated with economic activity and expectations for softer GDP growth, alongside ongoing shifts in transport fuel usage. But spare production capacity and inventories also indicate the market looks well supplied in the coming quarters—and should have flexibility in the event of a supply shock. We estimate unused production capacity at more than 5 million bpd, partly because of the OPEC+ supply restraint.

What We Think And Why

Additional disruption in critical seaborne routes could lead to a surge in oil prices.   The conflict in the Middle East hasn't materially disrupted global flows of crude. But any delays or stoppages—especially in the chokepoint Strait of Hormuz between Iran, and Oman and United Arab Emirates, where roughly 30% of global seaborne crude and liquified natural gas supply also transits—could have significant implications as the market digests the severity and length of the disruption. While closure of the Strait of Hormuz is a low-probability scenario, we believe reluctance from shippers or difficulties obtaining affordable insurance could also delay or constrain transit even without a full blockage. This could prompt sustained high prices (above $100 per barrel) that would likely reduce demand and incentivize further moves away from oil for transport. Higher average prices would likely have a greater economic impact than short-term spikes alone.

Higher energy prices could disrupt ongoing disinflation efforts.  Falling oil prices have largely helped lower inflation globally, giving central banks room to begin normalizing interest rates. But the effect of energy prices varies significantly by country, with emerging markets (EM) often the most affected due to energy's prominent role in their consumer baskets. If energy prices rise, EM central banks may be forced to recalibrate monetary policy. On the downside, this could result in a slower interest rate normalization in most EMs. On the upside, this would potentially provide additional fiscal opportunities through higher oil-related tax receipts.

A shock to energy prices could directly affect energy-intensive sectors, such as aviation and shipping.   The impact in energy-intensive sectors could be reflected in margin erosion—though some firms may be able to pass these costs onto the consumer by increasing the final price. As such, second-order effects from a protracted period of high oil prices could pose a higher risk for credit. Many sectors without direct exposure to commodities markets—including restaurants, leisure, and lodging; homebuilders; and container and packaging—could be affected by prices increasing in industries that are directly affected. Perhaps most notably, the potential erosion of households' purchasing power could dent demand for all goods and services.

Only a handful of countries are net beneficiaries of high oil prices.   When looking at the energy trade balance of the world's largest economies, most of the systemic EMs and largest frontier economies we rate are net energy importers. In other words, only a few countries that are net energy exporters benefit from higher oil prices—mainly through windfall fiscal revenues or royalties. Conversely, countries that are net energy importers often need to deliver fuel subsidies to stem inflation and its implications on households. In the case of EMs, this could strain fiscal accounts. In 2022, fuel subsidies reached record highs when the Russia-Ukraine war led to supply concerns and a surge in oil prices (even though Russian supply remains significant, at roughly 9 million barrels per day [mbd]). High energy prices, compounded with lingering spillovers from the pandemic during that year, ultimately led to high negative rating bias across most EMs and frontier economies. This was primarily driven by delayed fiscal consolidation for the 18 sovereigns with negative outlooks during the period.

What Could Change

Conflict in the Middle East could disrupt energy markets.   We view the likelihood of a protracted, direct conflict between Iran, and Israel and the U.S. as limited. But it now appears more likely that regional military forces aligned with Iran will seek to inflict damage on Israel and its allies' assets. This aligns with our moderate stress scenario. Iran-supported military forces have frequently sought to disrupt commercial economic interests. Related conflict has encompassed proxy strikes throughout the region, typically involving actions or threats that could hamper shipping through globally significant economic and trade routes. Such trade disruptions could increase oil prices and pose fiscal risks to energy importers.

Policy uncertainty could lead to a sharper-than-expected decline in oil prices.   This could occur if rising protectionism dents global trade and weakens global growth—consequently depressing demand for oil. The magnitude and scope of any new tariffs imposed on China will be critical to measure the potential impacts in both the U.S. and China. For example, a large increase in U.S. tariffs on all Chinese imports could significantly hurt its economic growth. U.S. President-elect Donald Trump suggested a 10% tariff on all goods imported into the U.S., as well as levies of 60% on all Chinese goods. The overall drag on real GDP could be as much as 1 percentage point, including both the income loss to U.S. households and the hit to American exporters. Further weakness in Chinese demand is another risk to oil prices because the country is the world's second-largest oil consumer (representing 15% of the global share).

Read More

• Widening Middle East Conflict Poses Risks For Regional Sovereign Ratings, Oct., 9, 2024
• S&P Global Ratings Revises Its Oil Price Assumptions; North American And Dutch Title Transfer Natural Gas Price Assumptions Unchanged, Oct. 1, 2024