EM Monthly: Black gold

March 11, 2025

If you have any feedback on this article or are interested in subscribing to our content, please contact us at opinions@muzinich.com or fill out the form on the right hand side of this page.

--------

With the oil price a key underlying contributor to emerging market portfolios, Vladimir David and Warren Hyland discuss how geopolitical and macroeconomic factors might determine its direction in 2025.

Black gold is oil’s well-deserved nickname. It is a precious and wealth-generating resource that powers the global economy. The discovery of new oil fields triggers economic surges, fuels industrial growth and national prosperity.

Oil prices shape global markets and influence consumer spending, government budgets and trade balances. As a strategic resource, oil is high on the agenda for national security in many countries, shaping international alliances and even igniting conflict.

For bond investors in emerging markets (EM), a clear roadmap for oil price moves can be a key driver of performance; significant shifts impact government bond yields as growth and inflation expectations adjust, shaping portfolio duration.

Rising uncertainty from oil price volatility affects investor risk appetite and influences portfolio beta management. Sharp price swings drive positioning shifts between oil-exporting sovereigns and manufacturing-based economies, and exposure adjustments to oil-sensitive sectors like energy, chemicals and transportation.

Oil is notoriously difficult to predict, as the following quote attributed to former Saudi Oil Minister Sheikh Zaki Yamani noted: "The oil market is ruled by surprises, and the biggest surprise is that people are still surprised".

This unpredictability becomes clear when examining key oil price drivers, which can be broadly split into three categories – demand, supply and exogenous factors.

Key drivers

First, investors must have a strong grasp of demand factors. Global growth is the most critical, an inherently complex and ever-changing variable that directly influences oil consumption.

The next challenge comes from forecasting supply. Key considerations include the unpredictability of OPEC+ production decisions and the "animal spirits" of US shale producers. Both play a crucial role in shaping the supply equilibrium needed to meet demand and maintain market balance.

Finally, there are external factors, often referred to as the "dark arts" of forecasting. These include market sentiment, speculative positioning and government interventions such as releases from the US Strategic Petroleum Reserve.

Price mapping

Given the challenges of predicting oil prices, a useful starting point is to leverage the "wisdom of the crowd”, an approach made famous by Francis Galton’s 1907 ox-weight experiment where the collective estimate of a crowd proved more accurate than individual experts when averaged.¹

For 2025, projections for the average Brent price range from US$65-92 per barrel (pbl;) across 33 forecasters (Fig. 1). Excluding the two highest and lowest estimates, the range narrows to US$67-81. The majority are clustered in the low US$70s, with a median price of US$74. In developing our roadmap, we have set the 2025 average Brent oil price at the median forecast of US$74, down from 2024’s US$79.8 average.

The next step is to assess the "rule of surprise", examining tail risks that could cause significant price deviations. For 2025, tail risks are skewed towards an oversupply imbalance, which partially explains the projected price decline.

The key factor driving tail risk is a potential policy shift under the new US administration, which could have significant implications for oil supply and demand dynamics.

However, the price impact of an imbalance caused by a fundamental shift in supply or demand is not constant. It depends on numerous variables including strategic inventory levels, industrial output and the choice of data set - particularly if it includes the pre-shale production era.

Using data from 2010 onward, our research suggests a 1 million barrel a day (bbl/d) swing in oil market balances corresponds to a c.US$12 move in price (Fig. 2).

Demand estimates

As for demand, global economic growth is projected to remain steady compared to 2024, with 3.3% estimated for 2025 and 2026, a slight increase from last year’s 3.2%.²

However, the downside risks to growth are significant, particularly due to the potential for an escalation in trade wars. A new wave of protectionist policies could increase tensions, reduce investment, distort trade flows and disrupt supply chains, all of which could weigh on global economic expansion in the near and medium term.

A full-scale tariff war could shave 0.3% off global growth for every 10% increase in tariffs.³ According to our analysis, this decline in economic output would translate to a reduction in oil demand of c. 350,000 bbl/d. If it reached 30%, it could reduce oil demand by around 1 million bbl/d. We estimate this would lead to a US$12 per barrel decline in oil prices.

Supply side

Investors also need to consider potential tail risks to oil prices from supply shocks. The first area to focus on would be the Trump administration’s so-called ‘3-3-3’ economic plan: at least 3% growth, a 3% budget deficit and an increase in US petroleum production by 3 million bbl/d (primarily by expanding Alaska’s resource development).

A supply surge of this magnitude would put significant downward pressure on oil prices due to an oversupply imbalance. However, how feasible is this target? Recent trends provide some insight. Between 2022 and 2024, Brent crude prices averaged US$87 pbl, while US oil production increased 0.7 million pbl/d annually (Fig. 3).

With the median 2025 price forecast of US$13 pbl lower, the incentive for producers to continue increasing output appears limited. Supporting this view, the US Energy Information Administration (EIA) projects a 0.64 million bbl/d increase in production between 2024 and 2028. Similarly, the International Energy Agency (IEA) estimates US oil supply growth at just 0.6 - 0.2 million bbl/d per year through 2028. Agency estimates fall short of the administration’s 3 million bbl/d target.

However, it is possible the administration has simply extrapolated recent trends. Over the past 2 years, US production increased c.700,000 bbl/d annually. Extending this trend over the next 4 years would yield a total increase of 2.8 million bbl/d - still slightly below the administration’s goal.

Alternatively, is the administration incorporating liquid natural gas (LNG) in its calculations? According to the US Department of Energy, planned US LNG supply additions for 2025-2028 amount to approximately 65 million metric tons per annum (MTPA).⁴ 

Since constructing new LNG facilities typically takes four years, these additions are largely fixed. The 65 MTPA expansion translates to roughly 520 million barrels of oil equivalent per year. If the administration includes LNG in its broader energy calculations, it may partially bridge the gap. However, achieving the full 3 million bbl/d increase remains highly ambitious given current market price projections and historic production trends.

Understanding the US administration’s geopolitical stance is also crucial, as it can significantly impact supply-side factors. It now appears likely it wants to facilitate a peaceful end to the Russia/Ukraine conflict. This raises the question: could a resolution lead to a sudden increase in Russian oil supply as sanctions are lifted?

According to IEA estimates, Russian exports declined from 8 million bbl/d to 7.5 million bbl/d, suggesting that up to 0.5 million bbl/d could return to the market.⁵ However, these estimates carry a high degree of uncertainty, as more than half of Russian oil tankers operate within the shadow fleet, making tracking difficult.

Additionally, Russia remains constrained by OPEC+ quotas, which are unlikely to be increased in an oversupplied market. That said, the regional implications could be significant. A reallocation of Russian oil back to the European Union would be beneficial from a procurement perspective. Meanwhile, China and India, currently purchasing discounted Russian oil, would face higher costs, potentially leading to inflationary pressures. Fig. 4 illustrates the EU’s decline in Russian oil imports by 1.25 million bbl/d from pre-war levels, with those volumes redirected to Asia.

Expect the unexpected

Iran is another area of geopolitical tension. If the US administration’s first term serves as any indication, investors should expect continued tensions between the two nations. A hardline stance on negotiations over Iran’s nuclear ambitions is likely.

Over the past decade, Iran’s peak oil production reached 3.8 million bbl/d (Fig. 6). Assuming full capacity remains intact, Iran could theoretically increase exports by another 0.5 million bbl/d if sanctions were eased. However, a “maximum pressure” approach appears more probable.

As recently as February 24, the US Treasury announced additional sanctions aimed at curbing Iranian oil production and exports, targeting over 30 entities and vessels involved in its oil trade.⁶ 

Given these measures, a decline in Iran’s oil exports seems likely. Of the 1.6 million bbl/d Iran currently exports, it would not be surprising to see a reduction. If the US administration follows the same policies as in its first term, exports could fall below 0.5 million bbl/d, representing a potential 1.1 million bbl/d hit to global supply balances (Fig. 5).

As for Venezuela, it remains a lost cause in terms of meaningful oil supply. As the US EIA stated: "Further increases in Venezuela’s crude oil production will take longer. Much of Venezuela’s crude oil production capacity and infrastructure has suffered from a prolonged lack of access to capital and regular maintenance“.⁷

In October 2023, the US issued a license authorizing transactions with PDVSA (Venezuela’s state-owned oil and natural gas company). However, since then production has increased by only 70,000 barrels of oil equivalent per day. If this license were not renewed by the current administration, the impact on global supply and prices would be negligible.⁸

Note: References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.

Higher for longer supportive for EM

With “higher for longer” as our key theme for commodities in 2025, we believe the median Brent price at US$74 per barrel is constructive for the energy sector, although tail risks could put downward pressure on prices (Fig. 6).

However, unless the US achieves its economic objective of increasing production by 3 million bbl/d, which we see as a low probability, we believe Brent prices should remain above US$60. This should enable the balance sheets of most energy companies to remain in good shape and cash flow generative.

Figure 6: "Rule of Surprise" Analysis

Source: Muzinich internal analysis, as of 28th February 2025. For illustrative purposes only.

Given this outlook, we retain a market weight to the energy sector. However, we have reduced exposure to companies sensitive to oil price fluctuations, i.e. those with weaker balance sheets, and are reallocating capital to downstream and quasi-government entities. A red-flag system is in place to significantly reduce exposure if the probability of the US administration achieving its oil production target increases, or if the median Brent forecast falls below US$60 per barrel.

EM look back – February

Fixed income

• It was a strong month for bond investors, with positive total returns across the board; US government bonds led the gains, with the 10-year Treasury (UST 10yr) delivering a 4% total return.
• Investment-grade (IG) credit outperformed high-yield (HY), while US dollar-denominated debt outperformed euro-denominated debt.

Past performance is not a reliable indicator of current or future results.

EM Credit

• EM corporate credit outperformed EM sovereign debt. IG was the standout sub-asset class, with Latin American credit leading the way due to its long-duration characteristics. In HY, Asian credit outperformed, driven by strength in Chinese securities.
• Telecommunications and homebuilders were the best performers, while quasi-sovereigns and non-bank financials lagged, although still generated positive returns.
• Argentinian and Ecuadorian bonds saw significant sell-offs due to political uncertainty.
• Chinese corporate credit had a particularly strong month, supported by growing confidence the property sector has bottomed and that government support for the private sector is returning.
• New issuance totalled US$33.5 billion, bringing year-to-date issuance to US$100 billion. Net financing for February was -US$12 billion, as bond maturities outpaced new issuance, while year-to-date net financing stood at US$6bn. Issuance was split IG and 35% HY. The Middle East and Africa was the most active region, accounting for 40% of total supply, while quasi-sovereign issuance made up 35%.

Rating actions

• Romania’s long-term foreign currency debt rating was affirmed by Fitch at BBB-, supported by EU membership and related capital inflows.

Monetary policy

• Poland’s central bank left interest rates on hold at 5.75%.
• Hungary left rates on hold at 6.5%, with the new central bank leadership seeing no room to cut rates given a rise in inflation.
• The Czech National Bank cut its key interest rate by 25bps to 3.75%.
• In Peru, the central bank left rates on hold at 4.75%.

Country-specific news

• South Africa's President Cyril Ramaphosa announced his desire to reach a broad-ranging agreement with the US on diplomacy and trade amid strained ties between the nations.
• Turkish annual inflation slowed to 39.1% in February, the lowest level in almost 2 years.
• President Donald Trump confirmed new 25% tariffs on imports from Mexico due to the latter’s failure to stop the flow of migrants and drugs across the shared border.
• In Colombia, the economy grew by a better than expected 1.7% in 2024 – ahead of the previous year’s 0.7% growth but below estimates. The finance ministry estimates 2.6% economic growth in 2025.
• In China, regulatory authorities announced they were looking to inject RMB 400bn (US$55bn) of fresh capital into state-owned banks, with the injection to be completed as soon as the end of June.
• Indonesia launched a new sovereign wealth fund, to optimize the management of its state-owned enterprises across the key sectors of banking, energy, mining, telecoms, and utilities. This move is aligned with the President Prabowo’s ambitious economic agenda to increase Indonesia’s GDP growth rate from the current level of 5% to 8% per year.

All sources are Bloomberg unless otherwise stated.

Market Data

Credit

Past performance is not a reliable indicator of current or future results.

Source: ICE data platform. as of 28th February 2025. EMGB - ICE BofA Emerging Markets External Sovereign Index EMCB - ICE BofA Emerging Markets Corporate Plus Index,  EMIB - ICE BofA High Grade Emerging Markets Corporate Plus Index, EMHB - ICE BofA High Yield Emerging Markets Corporate Plus Index, Q690 - ICE BofA Custom Emerging Markets Short Duration Index, EMRA - ICE BofA Asia Emerging Markets Corporate Plus Index, EMIA - ICE BofA High Grade Asia Emerging Markets Corporate Plus Index, EMHA - ICE BofA High Yield Asia Emerging Markets Corporate Plus Index , EMRL - ICE BofA Latin America Emerging Markets Corporate Plus Index, EMIL - The ICE BofA High Grade Latin America Emerging Markets Corporate Index, EMHL - ICE BofA High Yield Latin America Emerging Markets Corporate Plus, EMRE - ICE BofA EMEA Emerging Markets Corporate Plus Index, EMIE - ICE BofA High Grade EMEA Emerging Markets Corporate Plus Index, EMHE - ICE BofA High Yield EMEA Emerging Markets Corporate Plus Index,. Index performance is for illustrative purposes only. You cannot invest directly in the index. Indices selected provide best proxy for highlighting performance of emerging market corporate bonds. For illustrative purposes only. 

Yield to Worst

Source: ICE data platform. as of 28th February 2025. EMGB - ICE BofA Emerging Markets External Sovereign Index EMCB - ICE BofA Emerging Markets Corporate Plus Index,  EMIB - ICE BofA High Grade Emerging Markets Corporate Plus Index, EMHB - ICE BofA High Yield Emerging Markets Corporate Plus Index, Q690 - ICE BofA Custom Emerging Markets Short Duration Index, EMRA - ICE BofA Asia Emerging Markets Corporate Plus Index, EMIA - ICE BofA High Grade Asia Emerging Markets Corporate Plus Index, EMHA - ICE BofA High Yield Asia Emerging Markets Corporate Plus Index , EMRL - ICE BofA Latin America Emerging Markets Corporate Plus Index, EMIL - The ICE BofA High Grade Latin America Emerging Markets Corporate Index, EMHL - ICE BofA High Yield Latin America Emerging Markets Corporate Plus, EMRE - ICE BofA EMEA Emerging Markets Corporate Plus Index, EMIE - ICE BofA High Grade EMEA Emerging Markets Corporate Plus Index, EMHE - ICE BofA High Yield EMEA Emerging Markets Corporate Plus Index,. Index performance is for illustrative purposes only. You cannot invest directly in the index. Indices selected provide best proxy for highlighting performance of emerging market corporate bonds. For illustrative purposes only. 

References

1.National Geographic, as of January 31st 2013. “The real wisdom of the crowds”.
2.International Monetary Fund, as of January 2025. “World Economic Outlook Update. Global growth: divergent and uncertain”
3.World Bank, as of January 2025. Global Economic Prospects, Global Outlook, Chapter 1.
4.Muzinich analysis & Institutional for Energy Economics and Financial Analysis, Global LNG Outlook 2024 – 2028, as of April 2024. Latest available data used.
5.International Energy Agency, Average Russian oil exports by country and region, 2021-2024, as of 31st January 2025. Latest available data used.
6.Bloomberg, as of 26th February 2025. “Trump launches fresh sanctions on Iranian oil industry.”
7.US Energy Information Administration, as of 23rd October 2023. Venezuela’s heavy crude oil output increases are limited following US sanctions relief”.
8.OPEC estimates, as of 31st January 2025

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of March 2025 and may change without notice.

--------

Index descriptions

EMGB - ICE BofA Emerging Markets External Sovereign Index tracks the performance of US dollar and euro denominated emerging markets sovereign debt publicly issued in the major domestic and eurobond markets.  Qualifying securities must have risk exposure to countries other than members of the FX-G10, all Western European countries and territories of the US and Western European countries.

EMCB - ICE BofA Emerging Markets Corporate Plus Index tracks the performance of the US dollar and euro denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets. Qualifying issuers must have risk exposure to countries other than members of the FX G10, all Western European countries, and territories of the US and Western European countries.

EMIB - ICE BofA High Grade Emerging Markets Corporate Plus Index is a subset of the ICE BofA ML Emerging Markets Corporate Plus Index (EMCB) including all securities rated AAA through BBB3, inclusive.

EMHB - ICE BofA High Yield Emerging Markets Corporate Plus Index is a subset of the ICE BofA ML Emerging Markets Corporate Plus Index (EMCB) including all securities rated BB1 or lower.

Q690 - ICE BofA Custom Emerging Markets Short Duration Index tracks the performance of short-term US dollar and euro denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets.

EMRA - ICE BofA Asia Emerging Markets Corporate Plus Index is the subset of the ICE BofAML Emerging Markets Corporate Plus Index, which includes only securities issued by countries associated with the region of Asia, excluding Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan.

EMHA – The ICE BofA High Yield Asia Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BB1 and lower with a country of risk within the Asia region.

EMIA -  The ICE BofA High Grade Asia Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Asia region.

EMRL - ICE BofA Latin America Emerging Markets Corporate Plus Index is a subset of The ICE BofA Emerging Markets Corporate Plus Index including all securities issued by countries associated with the geographical region of Latin America.

EMIL - The ICE BofA High Grade Latin America Emerging Markets Corporate Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Latin America region.

EMHL - ICE BofA High Yield Latin America Emerging Markets Corporate Plus is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated sub-investment grade based on the average of Moody's, S&P and Fitch, and with a country of risk associated with the geographical region of Latin America.

EMRE - ICE BofA EMEA Emerging Markets Corporate Plus Index is a subset of The ICE BofA Emerging Markets Corporate Plus Index including all securities issued by countries associated with the geographical region of Europe, the Middle East and Africa including Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan.

EMIE - ICE BofA High Grade EMEA Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Europe, Middle East and Africa regions.

EMHE - ICE BofA High Yield EMEA Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Europe, Middle East and Africa regions.

The MSCI EM Index is a free-float weighted equity index that captures large and mid cap representation across emerging market countries. The index covers approximately 85% of the free float-adjusted market capitalisation in each country.

LDMP - ICE BofA Local Debt Markets Plus Index is designed to track the performance of emerging markets sovereign debt publicly issued and denominated in the issuer's own currency.

J0A0 - The ICE BofA ML US Cash Pay High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt, currently in a coupon paying period that is publicly issued in the US domestic market.

C0A0 - The ICE BofA ML US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.

HE00 - The ICE BofA ML Euro High Yield Index tracks the performance of EUR dominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets.

ER00 – The ICE BofA ML Euro Corporate Index tracks the performance of EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets.

ICE BofA High Yield Emerging Markets Corporate Plus India Issuers Index (EINH) - is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities with India as the country of risk that are rated sub-investment grade based on average of Moody's, S&P and Fitch

ADOL -The ICE BofA Asian Dollar Index tracks the performance of U.S. dollar denominated sovereign, quasi-government, corporate, securitized and collateralized debt publicly issued in the U.S. domestic and eurobond markets by Asian issuers.

ADHY - ICE BofA Asian Dollar High Yield Index tracks the performance of sub-investment grade U.S. dollar denominated sovereign, quasi-government, corporate, securitized and collateralized debt publicly issued in the U.S. domestic and eurobond markets by Asian issuers.

You cannot invest directly in an index, which also does not take into account trading commissions or costs. Additionally, indices do not include reinvestment of dividends, and the volatility of indices may be materially different over time.

Important Information

Muzinich and/or Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. Muzinich views and opinions.  This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall.

Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only.

This discussion material contains forward-looking statements, which give current expectations of future activities and future performance. Any or all forward-looking statements in this material may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Although the assumptions underlying the forward-looking statements contained herein are believed to be reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurances that the forward-looking statements included in this discussion material will   prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Further, no person undertakes any obligation to revise such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom. 2025-03-06-15623