Oil's Volatile Dance: Trade Wars and OPEC+ Compliance Undermine Market Stability

The oil market in early 2025 has become a battleground for clashing forces: OPEC+’s production policies, geopolitical tensions, and trade wars are colliding to create a landscape of extreme volatility. Brent crude prices have plummeted to four-year lows, hovering near $60–$65 per barrel, as traders grapple with oversupply risks, demand uncertainties, and the shadow of protectionism. This article dissects the key drivers shaping the oil market and their implications for investors.

OPEC+'s Delicate Balancing Act

In April 2025, OPEC+ announced an output hike of 411,000 barrels per day (kb/d), nearly tripling initial expectations, to signal confidence in a demand recovery. However, the move’s effectiveness is undermined by chronic overproduction among key members. Iraq, Kazakhstan, and the UAE are already exceeding their quotas by 440 kb/d, 390 kb/d, and 350 kb/d respectively, eroding compliance. Despite retaining 5.58 million barrels per day (mb/d) of spare capacity—primarily in Saudi Arabia—the alliance’s ability to stabilize markets remains in doubt.

Key Takeaway: OPEC+’s output decisions are less impactful than its compliance struggles. With structural overproduction and monthly policy reviews, the group’s influence over prices is waning.

Trade Tensions: The Elephant in the Tanker

The U.S.-China trade war has escalated to historic levels, with average tariffs of 145% on Chinese imports and 125% reciprocally. These measures have slashed global oil demand growth projections. The IEA now expects 2025 demand growth to fall to 730 kb/d, down 300 kb/d from earlier estimates, with further declines to 690 kb/d in 2026 as macroeconomic fragility and EV adoption bite.

The U.S. shale sector, once a growth engine, is now a casualty of low prices and tariff-driven cost pressures. Output growth has been slashed to 490 kb/d in 2025, down 150 kb/d from earlier forecasts. Meanwhile, non-OPEC supply from Brazil, Guyana, and Canada is set to add 920 kb/d by 2026—potentially swamping demand growth.

Geopolitical Risks: Hormuz and the $5 Risk Premium

The Strait of Hormuz, through which 18 million barrels per day (mb/d) of oil flows, faces escalating risks. Iranian naval activities and U.S. sanctions have injected a $5–$8/barrel risk premium into Brent prices. While a 90-day tariff reprieve in late April offered temporary relief, unresolved trade disputes could still trigger a 0.5–0.8% global GDP contraction—equivalent to 800 kb/d in lost demand.

China’s Economic Crossroads

China’s Q1 2025 GDP growth of 4.8%—below its 5% target—has dampened demand hopes. Strategic petroleum reserve builds and opportunistic purchases have added further uncertainty. While infrastructure stimulus could boost oil consumption by 300 kb/d, the lackluster start to the year suggests persistent fragility.

Market Dynamics: Stuck in a Volatile Funnel

Prices remain trapped in a $60–$65/bbl range, with technical resistance at $70/bbl and support near $65/bbl. OPEC+ compliance, though at 116% in March, is overshadowed by structural overproduction and geopolitical noise.

Conclusion: Navigating the Oil Crossroads

The oil market is a precarious equilibrium of overproduction, trade wars, and geopolitical risks. Key takeaways for investors:

1. Supply Overhang: Non-OPEC+ growth (920 kb/d by 2026) could outstrip demand, keeping prices anchored.
2. Trade Sensitivity: A resolution to U.S.-China tariffs could boost demand and prices by $10+/bbl.
3. Geopolitical Premium: Risks in Hormuz and Iranian tensions are persistent headwinds.

For now, Brent crude is likely to remain in its $60–$65 range unless a demand surprise or geopolitical escalation shifts the calculus. Investors should focus on producers with low break-even costs (e.g., ExxonMobil, Saudi Aramco) and hedge against volatility.

The oil market’s volatility is here to stay—investors must tread carefully, eyes fixed on trade negotiations and compliance updates.