Oil Prices Head Toward the worst annual performance since the pandemic as tensions with Russia rise

Oil prices are approaching their steepest annual decline since the pandemic-induced collapse of 2020, pressured by mounting concerns over a deepening supply glut. The deterioration in crude markets has intensified economic pressures on Russia, where a combination of Western sanctions and widening export discounts continues to erode revenues.

West Texas Intermediate crude oil futures, the US benchmark, are currently trading at approximately 58 dollars per barrel, representing a decline of nearly 20 per cent over the year. Brent crude futures stand at around 61 dollars per barrel. The sustained downward trajectory in prices reflects a fundamental imbalance between rising output from producers and moderating demand growth.

The supply and demand dynamic has exerted considerable downward pressure on prices throughout the year, effectively neutralising the impact of geopolitical tensions that would typically support crude valuations. Notable events, including US military strikes on Iran in June and American enforcement actions targeting sanctioned oil tankers serving Venezuelan routes, have failed to generate sustained price support.

Warren Patterson, head of commodities strategy at ING, observed earlier this month that the most striking characteristic of oil markets during this period has been the absence of volatility, particularly given the numerous geopolitical developments and supply risks. He attributed this unusual stability to market fatigue regarding geopolitical events and growing expectations of a supply surplus emerging in the latter portion of the year.

For Russia, persistently depressed prices have amplified the consequences of comprehensive Western sanctions imposed following the February 2022 invasion of Ukraine. Discounts on Russian crude sold at export terminals have returned to levels approaching historic highs, compressing exporter margins at a time when energy revenues have become increasingly critical for the Putin administration.

Russian crude traded at discounts ranging from 20 to 30 dollars per barrel below Brent prices during December, marking the widest differential at ports since early 2022, according to Reuters data. Analysis from Goldman Sachs earlier this month revealed that Russia’s oil export revenues, measured in rouble terms, have plummeted by 50 per cent over the year, falling from the equivalent of 7.6 per cent of gross domestic product to merely 3.7 per cent.

These revenue pressures coincide with a broader deceleration in Russian economic activity. The country’s GDP expanded by 0.6 per cent in the third quarter on a year-over-year basis, representing a slowdown from growth rates of 1.1 per cent in the second quarter and 1.4 per cent in the first quarter. The central bank now projects economic expansion of just 0.5 to 1.5 per cent in 2026 and has revised its 2025 growth forecast downward to 0.5 to 1 per cent from previous estimates.

This marks a sharp reversal from the 4.3 per cent growth achieved in 2024, when defence expenditure, state subsidies and elevated energy revenues provided substantial support to the Russian economy. The confluence of deteriorating oil revenues and slowing economic momentum presents significant fiscal challenges for Moscow as it continues to finance its military operations whilst managing the broader economic consequences of international sanctions.