Oil Plunges 7% to Multi-Year Lows as Trade War Intensifies

The oil market is in turmoil as prices plummeted 7% to multi-year lows, driven by escalating trade tensions and fears of a global economic slowdown. The recent tariffs imposed by U.S. President Donald Trump have sent shockwaves through the energy sector, with both Brent and WTI crude futures experiencing significant declines. This article delves into the factors behind the oil collapse, the role of OPEC+, and the potential long-term implications for the global energy market.



Market Dynamics

On April 4, 2025, oil prices fell further in early Asian trade, with Brent futures down 31 cents to $69.83 a barrel and U.S. West Texas Intermediate (WTI) crude futures down 32 cents to $66.63. This decline was attributed to U.S. President Donald Trump's new tariffs, which stoked concerns over a global trade war that could weigh on oil demand. The tariffs, announced on April 2, 2025, included a 10% baseline tariff on all imports to the United States and higher duties on dozens of the country's biggest trading partners. Although imports of oil, gas, and refined products were exempted from these tariffs, the policies could stoke inflation, slow economic growth, and intensify trade disputes, all of which could weigh on oil prices.

The Organisation of Petroleum Exporting Countries and their allies (OPEC+) also played a role in the bearish sentiment by advancing their plan for oil output increases. The organisation now aims to return 411,000 barrels per day to the market in May, up from 135,000 bpd as initially planned. This decision brings forward the expected surplus in the oil market this year, with more OPEC+ supply translating to more medium sour crude oil and a wider Brent-Dubai spread. Analysts at ING noted that this spread has seen an unusual discount for much of the year, further contributing to the bearish outlook.

OPEC+'s Role in Market Stability

OPEC+ plays a significant role in both stabilizing and destabilizing the oil market, particularly in response to geopolitical tensions and trade disputes. Their strategies involve adjusting oil production levels to influence global supply and, consequently, prices. However, the effectiveness of these strategies can vary based on market conditions and external factors.

For instance, on April 4, 2025, OPEC+ decided to advance their plan for oil output increases, aiming to return 411,000 barrels per day to the market in May, up from the initially planned 135,000 bpd. This decision was made in response to U.S. President Donald Trump's new tariffs, which stoked concerns over a global trade war that could weigh on oil demand. Analysts at ING noted that this move would bring forward the expected surplus in the oil market, potentially leading to more medium sour crude oil and a wider Brent-Dubai spread. This example illustrates how OPEC+ can destabilize the market by increasing supply, which can lead to a surplus and lower prices.

On the other hand, OPEC+ has also used production cuts to stabilize the market. In response to growing global oil inventories and falling oil prices in 2023, OPEC+ producers agreed to begin their first round of reduced oil production targets and additional voluntary production cuts in April 2023. This strategy aimed to prevent prices from falling further by reducing supply. However, the effectiveness of these cuts has been questioned, as they have been delayed several times, adding uncertainty to the market.

The IEA Oil Market Report (OMR) highlights that global oil supply rose by 240 kb/d in February 2025, led by OPEC+. Kazakhstan pumped at an all-time high as Tengiz ramped up, while Iran and Venezuela boosted flows ahead of tighter sanctions. This increase in supply, despite OPEC+'s production cuts, suggests that their strategies may not always be effective in stabilizing the market.

Long-Term Implications

The potential long-term effects on oil prices are significant. Bart Melek, head of commodity strategy at TD Securities, suggested that the U.S. tariffs and retaliation from targeted countries could result in crude oil demand being weaker than previously forecast. He predicted that demand would probably increase by less than 1 million barrels per day, while supply would likely grow by "materially" more than that, resulting in a robust surplus over the next nine months. This surplus could lead to more downside in oil prices, as the market adjusts to the new supply and demand dynamics.

The IEA Oil Market Report (OMR) highlights that growth in global oil demand is set to accelerate to just over 1 mb/d this year, from 830 kb/d in 2024, reaching 103.9 mb/d. However, recent delivery data have been below expectations, leading to slightly lower estimates for 4Q24 and 1Q25 growth at 1.2 mb/d y-o-y. This uncertainty in demand growth, coupled with the increased supply from OPEC+, could put further downward pressure on oil prices in the long term.

Conclusion

In summary, the recent tariffs and trade war escalations have created a bearish outlook for oil prices, with increased supply from OPEC+ and potential weakening of demand due to economic slowdowns. The long-term effects could include a robust surplus in the oil market and continued downward pressure on prices. Investors and market participants will need to closely monitor the evolving geopolitical landscape and OPEC+'s production strategies to navigate the volatile oil market effectively.