EIA Highlights Geopolitical Risk Premium for Oil Prices

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Even before the brief conflict between Iran and Israel, geopolitical risk was enough to warrant an upward revision in crude oil prices, the U.S. government said.

West Texas Intermediate (WTI), the U.S. benchmark for the price of oil, was trading at around $68.50 per barrel early Wednesday, up slightly from the prior settle. WTI had dipped below $60 per barrel this year on concerns that U.S. trade policies would undermine global growth.

In its Short-Term Energy Outlook (STEO) for July, the Energy Information Administration (EIA), part of the U.S. Department of Energy, said it expected WTI to average $65.22 per barrel this year. That's nearly $3 per barrel higher than forecast from the STEO for June.

Data models were completed before the brief war between Iran and Israel caused a jump in crude oil prices. WTI spiked as high as $75.14 per barrel in mid-June as the fighting intensified.

"The increase in the forecast is driven largely by higher near-term prices due to a more significant geopolitical risk premium from the conflict," the EIA's report read.

But even with the risk premium, the EIA said global inventories are expected to increase due to macroeconomic concerns, putting a governor on how high oil prices can get. Even as the direct fighting ebbs, the proxy war in the Middle East continues.

On Sunday, the United Kingdom Maritime Trade office said a merchant vessel was targeted by rocket-propelled grenades fired from a small craft off the coast of Yemen. The Houthi rebel group, supported by Iran, ramped up its attacks on shipping lanes in and around the Red Sea after Hamas militants in the Gaza Strip stormed Israel in 2023.

Iranian legislators had voted to block traffic through the Strait of Hormuz and Qatari airspace was closed at the height of the conflict. Refineries in both Iran and Isreal were hit by missiles during the fighting.

The fighting has since subsided. Iran's official Islamic Republic News Agency reported Iran's foreign minister met Tuesday with the Saudi crown prince, a former arch-rival, to discuss regional issues.

There's been little physical disruption yet to the oil market, however, as sanctions limit what Iran, a founding member of the Organization of the Petroleum Exporting Countries, can put on the water.

The price of oil, meanwhile, had dropped below the point at which many drillers in the U.S. shale patch can make a profit. Successive surveys from the Federal Reserve Bank of Dallas had found upstream energy companies frustrated with President Donald Trump's economic policies.

A "drill, baby, drill" mentality does not align with a tariff policy that both undermines global economic growth and increases the cost of goods at home, survey respondents said. Tariffs on steel, meanwhile, hurt the midstream sector, since U.S. manufacturers don't make much of the material used in pipelines.

Even with the upward revision to crude oil prices, the EIA said the domestic sector was slowing down in terms of drilling and completion activity this year. As a result, the agency said it was lowering its forecast for domestic production, from an all-time high of 13.4 million barrels per day (BBL/d) on average for the second quarter to less than 13.3 million BBL/d by the fourth quarter of next year.

"On an annual basis, we now forecast crude oil production will average 13.4 million BBL/d in both 2025 and 2026," the agency said.

That's unchanged from the prior month's report. The entire decline, meanwhile, is expected to come from inland U.S. shale deposits. Offshore production is expected to average 1.8 million BBL/d this year and increase to 1.84 million BBL/d by 2026.

The bulk of the onshore decline is from the Permian Basin, which accounts for about 60% of total onshore production. The EIA expects production to average 6.53 million BBL/d this year, falling by around 30,000 BBL/d by next year.

As basins mature over long periods of production, the pressure in wells declines. As the pressure drops over time, heavier hydrocarbons get trapped in subsurface pores, allowing room for lighter products such as natural gas to move into the production well, while heavier molecules remain trapped.

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