Fri, 05/09/2025 - 11:50
Given that oil is the lifeblood of international commerce, it's hardly a shock that crude oil prices have been suffering amid recent escalations in the US-China trade war. Since Trump's Liberation Day tariff announcements, which included up to 145% levies on Chinese goods, Brent and West Texas Intermediate (WTI) have lost an average of almost 20% and now (08/05) sit at multi-year lows of $61.41 and $58.43, respectively. Things were even more worrying during the Asian session on 5 May when both Brent and WTI futures reached their lowest point since February 2021, slumping as low as $58.50 per barrel and $55.53, respectively, at one point.
With the key driving season around the corner, it's unusual to see oil struggling to make progress, though the headwinds continue to swirl for the energy resource. Between OPEC+ production increases and the continuation of an anti-trade policy by the US despite the announced start of negotiations in Switzerland this weekend, a perfect cocktail of oversupply and demand uncertainty is weighing heavily on crude. But what are the deeper implications of these and other factors affecting oil, and how could prices develop over the remainder of the year?
Too much of a good thing
In light of the trade disruption and producer uncertainty, supply could already be said to be quite high. But now that OPEC+ has agreed to ramp up its supply even more quickly than originally planned, there are fears that we could be approaching an oversupply scenario, which would likely cause further price declines. On 3 May, eight OPEC+ members agreed to increase production by 411,000 barrels per day (bpd) next month in an acceleration of the group's ongoing plan to wind back the production cuts that began in April. By June, the cumulative increase will stand at 957,000 bpd, further depressing prices already under pressure from deteriorating global trade conditions.
In a statement following the decision, OPEC+ noted that "the gradual increases may be paused or reversed subject to evolving market conditions. This flexibility will allow the group to continue to support oil market stability," which does give some room for manoeuvre if a solution to the demand-side problems cannot be resolved. One silver lining for oil investors is that US inventories are at least declining from recent highs. In the week ending 25 April, the EIA reported commercial crude oil stockpiles (excluding the Strategic Petroleum Reserve) fell by 2.7 million barrels to 440.4 million barrels, a dip of 6% below the five-year average for this time of year. This comes after analysts from The Wall Street Journal predicted an increase of 100,000 barrels as opposed to a decline. In the short term, this could help take some of the pressure off crude prices, but we would need to see positive developments in the planned US-China trade talks in order for the uptrend to be sustained long-term.
Giving in to demand
Given that we've established that the supply of oil to markets is, if anything, too healthy - barring any military action involving major producer Iran - it will surely be the demand side that determines the direction of oil prices in the medium term. Looking at the IEA's April forecast, global oil demand growth for 2025 has been revised down by 300,000 bpd month over month to 730,000 bpd, and with growth tipped to slow further in 2026 to 690,000 bpd. All of this comes against the backdrop of a world oil supply up 590,000 bpd to 103.6 million bpd in March, with even higher numbers set to come following this week's OPEC+ output increases.
The current numbers are based on a worst-case scenario for global demand, but with supply on track to double demand by the end of the year, it's worrying for prices, to say the least. Yet the recent push to increase the OPEC+ supply was led by Saudi Arabia, with the kingdom slamming the IEA demand outlook as flawed and biased towards energy transition. Then, somewhat counterintuitively, the country announced that it was increasing selling prices for Asian markets, a policy that on the face of it looks at odds with a drive to increase supply. However, as talks begin this weekend between the US and Chinese trade delegations in Switzerland, it could be that the Saudis are preempting an end to the trade war and a resurgence in Asian demand. Whatever comes of the negotiations between US Treasury Secretary Scott Bessent and his Chinese counterpart, it's important to note that the tariffs announced against a raft of other key US trading partners are only "paused" until August, so the potential for sustained or even worsening demand is still very much there.
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