Oil Touches Multi-Year Lows Amid Excess Supply and Trade War Concerns

Oil prices have plummeted to multi-year lows, with concerns about excess supply and the impact of the U.S.-China trade war weighing on the market. The price of Brent crude oil, the global benchmark, fell below $60 per barrel in late August, its lowest level since January 2017. West Texas Intermediate (WTI), the U.S. benchmark, also dropped to its lowest level since February 2017, trading below $55 per barrel.



The decline in oil prices can be attributed to several factors, including increased production from non-OPEC+ countries, OPEC+ production cuts, and slower demand growth. In both 2023 and 2024, oil production outside of OPEC+ was strong enough to largely offset the increase in global oil consumption. This was primarily due to increased production from countries in North and South America, such as the United States, Canada, Guyana, and Brazil. These countries increased their total liquids production by a combined 1.1 million barrels per day (b/d) in 2024 (IEA, January 2025).

OPEC+ members reduced production by an estimated 1.3 million barrels per day (b/d) in 2024, while production by countries outside the group increased by 1.8 million b/d. However, OPEC+ production cuts are scheduled to unwind by 2026, which could lead to increased supply in the long term (EIA, January 2025).

Despite the strong production growth, global oil demand growth has been relatively slow. In 2024, global oil demand growth was assessed at 940 kb/d, and it is expected to accelerate to 1.05 mb/d in 2025 as the economic outlook improves marginally (IEA, January 2025). However, this growth rate may not be sufficient to absorb the increased supply from non-OPEC+ countries.

The U.S.-China trade war has also contributed to the decline in oil prices. The event study method, which has become a standard analytical tool for evaluating the economic or financial impact of specific unexpected events, can be used to analyze the impact of the U.S.-China trade war on oil and agricultural commodity markets. By employing volatility impulse response function (VIRF) analysis, researchers can examine the responsiveness of oil and agricultural commodity markets to the U.S.-China trade war and other exogenous shocks. The results show that the volatility of soybeans exhibits the highest level of responsiveness to the U.S.-China trade war, indicating that geopolitical tensions can have a significant impact on commodity markets (Source: "The event study method has become a standard analytical tool").



In conclusion, the current excess supply concerns in the oil market are driven by several key factors, including increased production from non-OPEC+ countries, OPEC+ production cuts, and slower demand growth. The U.S.-China trade war has also contributed to the decline in oil prices. While these factors may continue to drive excess supply concerns in the short term, the evolution of these factors in the long term will depend on various uncertainties, such as changes in OPEC+ policies, the sensitivity of U.S. crude oil and other liquids production to changes in crude oil prices, and the trajectory of global oil consumption growth.