The global oil market appears to have entered a new ‘bear’ era. This was demonstrated, in particular, by the 12-day war between Israel and Iran. Despite enormous geopolitical risks and the threat of the Strait of Hormuz being blocked, the market's reaction was restrained and short-lived.
Oil prices are under pressure from fundamental factors. Supply growth is outpacing demand, while OPEC+, against this backdrop, is ‘relaxing’ voluntary production cuts, thereby further increasing the market surplus. Current forecasts for the price of a barrel in 2025 lie in the range of $66–68. Considering that the average price over the first five months was $71, we can expect a decline to $61–65 per barrel by the end of the year.
This price range aligns with the revised forecast by the Russian government, but budget revenue plans may still fall short. One of the ongoing pressures on Russian oil income is the discount of Russian crude relative to Brent, which has recently stabilised at around $12 per barrel.
At the same time, as prices fall, the significance of the price cap, which was set at $60 per barrel when it was worth $90, is declining. The idea of lowering the cap to $45 is supported by most of Ukraine's Western allies, but is being blocked by Donald Trump.
An alternative mechanism for putting pressure on Russian exports is a bill proposed by US Senator Lindsey Graham, which would impose high tariffs on countries buying Russian resources. However, this approach appears contradictory and difficult to implement in practice.
Meanwhile, market conditions are such that a theoretical scenario involving a complete replacement of Russian oil supplies to India with those from other countries is now entirely plausible.
Most experts and forecasters do not expect Brent prices to fall below the $55–65 per barrel range, which corresponds to the break-even point for US oil production. If sanctions remain in place and the discount on Russian crude persists, this would mean prices for Russian oil could fall to around $50 per barrel or even lower.
Such a scenario would severely limit the potential of the Russian economy and the capacity of its federal budget, but it would not lead to collapse. Nonetheless, the oil market surplus significantly increases Russia’s vulnerability, both economically and politically, expanding the avenues for pushing Russian oil out of the global market.
The global oil market has entered a new bear market. The 12-day war in the Middle East revealed its resilience to geopolitical shocks. This resilience stems from structural changes that have taken place in recent years. Even when the threat of the Strait of Hormuz being blocked – through which, according to the US Energy Information Administration (EIA), about 20% of global oil supplies (and all of Qatar’s LNG exports) pass—became a real possibility, the price increase was moderate and short-lived. Once the Iran–Israel conflict began to de-escalate, Brent prices returned almost to their previous levels—$67–68 per barrel, around $10 less than at the start of the year. ‘The global market is awash with oil,’ says Bloomberg columnist Javier Blas. Summer prices are supported by seasonal demand increases, but a decline is traditionally expected in autumn.
In 2025, global oil supply will increase by 1.8 million barrels per day (bpd), reaching 104.9 million bpd, according to the June oil market report by the International Energy Agency (IEA).Meanwhile, demand is forecast to rise by only 720,000 bpd, bringing total annual demand to 103.8 million bpd. In its January forecast, the supply increase was projected at the same level, but demand growth was estimated to be 220,000 bpd higher. The IEA attributes this downgrade to a noticeable slowdown in oil demand growth in the US, in addition to China. As a result, the surplus on the market could reach about 1.1 million bpd by year-end. OPEC forecasts traditionally offer more conservative estimates. Where the IEA speaks of a surplus, OPEC speaks of a deficit. In its latest report, the cartel also claims that demand for oil produced by OPEC+ countries exceeds supply. However, unusually, the gap between demand and supply is gradually shrinking, from nearly 1 million bpd in March to under 600,000 bpd in May.
According to sources from Bloomberg and Reuters, OPEC+ is highly likely to agree on yet another production increase, by 411,000 bpd starting in August, at a meeting on 6 July. The cartel has already raised production by the same amount in May, June, and July. This next phase of 'relaxation' has not yet been factored into the IEA's surplus forecasts. In reality, however, the net increase in supply will be smaller, as several cartel members are simply legalising their production overages.
Meanwhile, the price decline has not yet led to reduced output in the US: at $65 per barrel, American producers are operating comfortably and can initiate new developments, notes Blas. A price of $60 per barrel allows existing projects to remain profitable, $55 is the bare minimum for break-even, and $50 is the threshold below which production may start to decline. During the war, US companies managed to secure forward contracts at prices above $70, ensuring medium-term stability for the industry. Given that OPEC+ countries are aiming to reclaim market share lost under the voluntary restrictions agreement, they may continue increasing output until the price drops below $60.
According to a survey of 40 leading analysts and economists conducted by Reuters, the average price of Brent in 2025 will be $68 per barrel. Given that the average for the first five months was $70.8 per barrel, prices will need to drop to around $65 in the second half of the year for this forecast to materialise. The current EIA forecast suggests an average of $66 for the year, which implies a drop to $61 per barrel in the second half.
Russia’s 2025 budget was initially based on an oil price of $81.7 per barrel. Following the revised forecast, the Ministry of Finance lowered its estimate of oil and gas revenues by nearly a quarter, to 8.32 trillion roubles. This is based on an expected average annual price of $68 per barrel of Brent. In January–May, budget revenues, according to the Ministry of Finance, amounted to 4.24 trillion roubles. This is 14.4% lower than the same period in the previous year, and just over 50% of the total forecast for 2025. However, with lower prices expected in the second half of the year, meeting even the revised annual revenue target remains in doubt.
A highly significant factor in this context is the size of the discount on Russia’s Urals crude relative to Brent. Between January and May, the average price of Urals stood at $59.04 per barrel, dropping to $52 in May. According to data from the Russian Ministry of Finance, the discount to Brent has stabilised in recent months at around $12 per barrel. At the same time, physical exports of oil and petroleum products, according to the IEA, also declined in May to 7.3 million bpd. This is 230,000 bpd less than in April, and 380,000 bpd below May 2024 levels. Revenue amounted to $12.6 billion, a decrease of $480 million compared to April and $4 billion less than in May of last year. Export revenues from crude oil fell to their lowest level since February 2021, while revenues from petroleum product exports dropped to their lowest point since June 2023, IEA analysts calculated.
Russia’s oil revenues may suffer even more if Ukraine’s allies continue to maintain sanctions pressure. As the oil price has now approached the $60 per barrel mark, lowering the price cap for Russian crude, which was set in December 2022, has become necessary. The current level was introduced when Brent was trading at $90, making the cap roughly two-thirds of that price. On that basis, a new cap could be set at $40–45 per barrel. This measure has been under discussion for several months but faces opposition from Donald Trump’s administration. At the G7 meeting in June, participants once again tried to persuade the US President of the need to lower the cap, proposing a new benchmark of $45 per barrel. However, due to the crisis surrounding Iran and the volatility in oil prices, the matter was postponed.
Now that the situation has stabilised and the market has returned to a 'bearish' trend, the issue is back on the table. According to the Centre for Research on Energy and Clean Air (CREA), a reduction in the price cap to $45 per barrel in May alone would have reduced Russia’s oil revenues by 27%, or €2.8 billion. This estimate, however, assumes full compliance with sanctions (something that has yet to be achieved). CREA also estimates that, had the $60 price cap been strictly enforced from the outset, Russia’s oil revenues would have been 11% lower, or €39.01 billion. Nevertheless, even though most Russian oil is still being sold above the cap, it continues to impact sellers’ costs and the level of discount Russia is forced to offer buyers, thus reducing federal budget revenues.
It is possible that the measure to lower the cap will be included in the EU’s 18th sanctions package, as initially planned. According to Reuters, this may be agreed upon this week. However, the EU’s ability to enforce a lower cap without US support is limited. The cap’s effectiveness, reflected in the size of the discount (the spread between Brent and Urals prices), depends in part on how determined the allies are to go after buyers of Russian oil and the so-called 'shadow fleet'. A Brookings study found that sanctions on the shadow fleet are most effective when imposed simultaneously by the US, EU, and UK. For a long time, it was primarily the US pursuing such measures. The EU and UK only introduced sanctions against a significant number of vessels in May: the UK targeted 119 ships, while the EU listed 189. By that point, oil prices had already fallen (with Brent averaging $64 in May), so a large portion of Russian oil was being legally transported by Western-owned tankers not associated with the shadow fleet. According to CREA, these accounted for 54% of Russian oil shipments in May. This is up from a previous share of 30–40%. Thus, even a lower price cap enforced only by the EU and UK, without the US, would exert some pressure on Russia’s oil trade.
An alternative instrument for exerting pressure on Russia’s oil revenues has been proposed by US Senator Lindsey Graham, who drafted legislation calling for 'crushing tariffs' of 500% on countries purchasing Russian oil, petroleum products, natural gas, or uranium. However, the mechanism for implementing this measure remains unclear.
In its original form, the Graham bill, which is co-sponsored by 84 other senators, was widely seen as absurd, as it proposed tariffs against all buyers of Russian raw materials, including EU countries and even the US itself. In a revised version, it suggests targeting countries that both import raw materials from Russia and do not provide aid to Ukraine. Yet this criterion also reflects Senator Graham’s poor grasp of the situation. The main buyers of Russian oil – China and India – have both offered humanitarian assistance to Ukraine. The Ukraine Support Tracker project includes them among Ukraine’s donors, though without specifying volumes. This likely means only hundreds of thousands (or at best, a few million) dollars since the start of the war.
However, since mid-April, Graham’s initiative has also been blocked by Trump. Previously, this could be attributed to Trump’s greater focus on the 'Iran question', with the need to exert pressure on Russia and halt the war in Ukraine seen as secondary. Applying pressure on both of the world's key oil suppliers simultaneously may have seemed too risky. However, on 30 June, in an interview with ABC News, Graham stated that during a round of golf, Trump had finally given the green light to the bill, and discussions would begin once the Senate returned from its July recess. Nevertheless, Trump, who would retain the final authority to impose the tariffs, does not plan to act immediately, but views the legislation as a tool to exert pressure on Russia.
Nevertheless, it is not easy to see how this instrument could function. According to CREA, 85% of Russian oil exports go to China (47%) and India (38%). The US has just reached an agreement with China on key aspects of trade policy, making the prospect of a new trade war over Russian oil seem unlikely. India, on the other hand, which is not among the US’s top ten trading partners, is a more plausible target.
According to Reuters, India imported 1.8 million barrels of Russian oil per day in May. Early last year, Indian oil minister Hardeep Singh Puri warned that Brent could surge to $150 per barrel if India had to replace Russian oil with Middle Eastern supplies. Yet under current market conditions, this seems entirely implausible: even in the event of a Hormuz Strait blockade, analysts estimated a worst-case Brent price of around $110. Moreover, the oil surplus projected by the IEA for the year and the OPEC+ production increase agreed for August already account for three-quarters of Russian supplies to India. In total, OPEC+ countries have planned to raise production by 2.2 million bpd by the end of 2026. This means that, in the event of market instability or emergency, they could accelerate the lifting of prior voluntary cuts. In theory, therefore, a plan to replace Russian oil supplies to India is feasible, and would deprive Russia of over a third of its oil export revenue.
While the probability of such an extreme scenario is low, its feasibility alone highlights that the current surplus in the oil market is likely to remain a defining factor for the foreseeable future. At present, the estimated breakeven level for US oil production, which is around $50–55 per barrel, acts as a price floor. However, if Brent drops below $60, then, under sanctions, Russian crude could fall below $50. This would create serious (though not catastrophic) challenges for the Russian economy and its budget. In any case, a surplus-driven oil market will not only constrain Russia’s economic potential and fiscal income, but will also render the country significantly more vulnerable to economic and political pressure than in the past.