Oil Prices Plunge to Four-Year Lows as Trade Wars Ignite Recession Fears

The global oil market is in turmoil. In May 2025, Brent crude prices fell to their lowest levels since 2021, dropping below $60 per barrel before stabilizing near $65—a monthly decline of 15–18%, marking the steepest drop since late 2021. The catalyst? A perfect storm of trade tensions, economic slowdowns, and strategic shifts in oil production.

The Trade War’s Impact on Demand

The U.S.-China trade war has become the linchpin of oil market volatility. New tariffs—145% on Chinese goods and 125% on U.S. products—have triggered a synchronized economic slowdown. The International Monetary Fund now forecasts global growth of just 2.8% in 2025, down from 3.3% earlier, with U.S. growth slashed by nearly a full percentage point to 1.8%.

This slowdown has hit oil demand hard. The International Energy Agency (IEA) cut its 2025 demand growth forecast by 300,000 barrels per day (b/d) to 730,000 b/d, while the U.S. Energy Information Administration (EIA) trimmed its projection by 400,000 b/d to 900,000 b/d. OPEC, though more optimistic, still reduced its 2025 outlook by 150,000 b/d to 1.3 million b/d, citing "counter-measures" from Beijing and Washington that "exacerbate uncertainty."

Supply-Side Pressures: OPEC+, Shale, and Geopolitics

While demand weakens, supply risks are compounding the bearish trend. OPEC+’s May decision to boost production by 411,000 b/d—tripling its initial plan—has added to oversupply fears. However, compliance issues may limit the actual increase. Kazakhstan, for instance, is already producing 390,000 b/d over its quota after its Tengiz field expansion, while Iraq and the UAE are also overproducing.

Meanwhile, U.S. shale growth has stalled. The EIA now expects U.S. output to rise just 260,000 b/d in 2025, down from earlier projections, as producers face a break-even price of $65/bbl—now barely met by current prices. Non-OPEC+ supply, however, is booming: Brazil, Guyana, and Canada are set to add 1.3 million b/d in 2025 alone.

Geopolitical risks add another layer. U.S. sanctions on Venezuela, Russia, and Iran have curbed their production capacity, but their impact on global supply remains limited. Instead, the focus is on OPEC+’s fractured discipline and the U.S.-China trade impasse.

Outlook and Investment Implications

The oil market faces a "bumpy ride" through 2026, according to the IEA. Key risks include:
1. Trade Policy Uncertainty: A 90-day "reprieve" on tariffs offers temporary relief, but no long-term deal is in sight.
2. OPEC+ Compliance: If overproduction persists, prices could slip further. The EIA forecasts Brent to average $68/b in 2025 and $61/b in 2026.
3. Demand Recovery: OPEC bets on China’s petrochemical sector (accounting for 50% of global demand) to offset weakness, but this hinges on trade tensions easing.

Conclusion

Oil’s plunge to four-year lows underscores the fragility of a global economy caught between trade wars and supply gluts. Investors must weigh two scenarios:
- Bearish Case: If trade tensions deepen and OPEC+ fails to curb oversupply, prices could test $50/b, as some analysts predict.
- Bullish Case: A tariff truce or a surprise demand surge (e.g., from China’s infrastructure spending) might stabilize prices near $70/b.

The EIA’s forecast of $68/b for 2025 averages and the IEA’s warning of 700,000 b/d inventory builds in 2025 highlight the downside risks. For now, the market remains trapped in a "negative spiral," with no clear resolution to the trade war on the horizon. Investors should brace for volatility—and hope for diplomatic breakthroughs.

As the saying goes, "markets hate uncertainty." In 2025, that uncertainty is oil’s worst enemy.