Experts warn of trade tensions on oil demand

Oil drilling rigs

Oil prices witnessed recently significant fluctuations, with Brent crude falling below $60 per barrel for the first time in years. This decline was driven by escalating trade tensions between the US and China, concerns over a potential drop in global demand, and OPEC+'s decision to increase production starting in May.

However, markets witnessed a quick recovery after US President Donald Trump announced a halt of tariffs on certain countries. This eased trade war worries, pushing oil prices back up to above $63 per barrel currently.

Experts told Argaam that the recent rebound in oil prices does not reflect real stability but rather comes amid sharp volatility and ongoing concerns about an economic recession and a decline in global demand.

They explained that trade tensions are still a major pressure, while OPEC+'s decision to increase output added to the uncertainty, amid a potential battle for market share and compliance discrepancies within the alliance.

Demand slowdown, excess supply pressures oil prices

Carole Nakhle, CEO of Crystol Energy, said the fall in oil prices below $60 bpd is mainly due to the gloomier demand outlook following Trump’s sweeping tariffs’ announcement, which has increased the odds of a slowdown in global economic growth and that in turn will negatively affect oil demand growth.

Carole Nakhle, CEO of Crystol Energy

Even before Trump’s ‘liberation day’ tariffs, oil demand was not booming, Nakhle said. She added that China, the world’s largest importer of crude oil, has been battling ongoing structural economic problems, and just when we started to see some green shoots, the tariffs hammer hit.

At the same time, there was no shortage of supplies particularly from outside OPEC+ led by the US. Then OPEC+ not only decided to stick to its decision to release, as of this month, some of its previously withheld barrels, but also accelerated the release of those barrels by more than tripling the originally planned increase.

"At the end, we have too much supply chasing too little demand and that explains the price levels we are seeing today," Nakhle said.

Naif Aldandeni, an energy strategy expert, said markets experienced sharp volatility during the first week of April 2025, following Trump's announcement of fresh tariffs and China's strong response, raising widespread fears of a potential global economic recession.

Naif Aldandeni, an energy strategy expert

He added that the announcement of tariffs coincided with OPEC+'s decision to accelerate production hikes starting from May, which amplified pressures on oil prices. This occurred despite the White House's confirmation on April 3 that oil and gas imports would be exempt from tariffs.

Michael Brown, Senior Research Strategist at Pepperstone, said really been a perfect storm for crude recently, with supply ramping up, as concerns over falling demand intensify.

"On the supply side, not only do we have Trump still pushing his "drill baby, drill" agenda to increase US production, but also OPEC+ announcing that the May output hike would be triple that which had previously been communicated," Brown said.

Michael Brown, Senior Research Strategist at Pepperstone

Simultaneously, demand worries have surged as Trump's tariff announcements sparked concerns over a US recession, and global macro slowdown, both of which would see demand slide substantially.

The recent rebound comes as these growth worries fade somewhat, though feels rather shaky in nature, especially given the brutal impact that tariffs will still have on the Chinese economy, Brown said.

As for motivations behind OPEC+'s output hike decision, Nakhle said the main suspicion is that the non-compliant members within OPEC+ have exhausted the patience of the most disciplined members which have been carrying the burden of the cuts for some time.

"This is not new; cheating has always been a feature of OPEC (and now OPEC+) since its inception, and there have been several instances where OPEC’s most influential and compliant members opened their tabs to punish the cheaters after their continuous calls for compliance fell on deaf ears," Nakhle said.

She added that the problem, however, is that all OPEC+ members will suffer from the lower oil price environment especially under existing market conditions, though some have a higher pain threshold than others.

There are two additional explanations that can explain such a decision, the first is that OPEC+ believes that the low oil price environment is here to stay for a while and it would be better for some members, especially those who invested heavily in expanding their production capacity, to safeguard market share. The second reason is that they expect a significant loss of barrels from established producers such as Iran, Venezuela and even Russia, so the market can absorb the additional barrels without crashing prices.

On the other hand, Al-Dandani said the time of OPEC+'s decision should not be directly linked to political objectives or as a reaction to US tariffs. He noted that the increase was based on technical studies conducted by the Joint Ministerial Monitoring Committee (JMMC), which showed healthy growth indicators in demand, particularly with the approach of summer, increased electricity consumption, and higher tourism-related activities.

Under this decision, the countries that had previously failed to meet their production commitments can raise their output within the allocated quotas, ensuring they remain within the prescribed limits.

Brown pointed out that the decision reflects a shift in OPEC+'s strategy, where prices are no longer the top priority. Instead, the focus was shifted to retaining buyers and preventing them from turning to new US supplies.

He warned that adopting this approach could lead to a prolonged war for market share, increasing the risk of oversupply and putting additional pressure on prices.

Trade wars seen to feed into slower demand

Nakhle said trade wars are bad news for global economic growth, which in turn will feed into a slower demand for various commodities, including oil. If that happens at a time when oil demand is not booming (and it hasn’t been booming despite the relatively low price environment that has prevailed for a while now), then the impact will be significant.

"That said, the net effect is not clear cut. First of all we have a fluid situation and no clear end in sight. Second, one can argue that a slowdown in economic growth and ‘cheap’ fossil fuels will decelerate the energy transition, lend a new life line to oil and delay peak oil demand that many expected in the next few years," she said.

Meanwhile, Brown said the Sino-US trade tensions will naturally be a significant n/t driver of crude, though there is some hope - and it is only hope - that we may be at the peak of those tensions right now.

"The bulls will likely be seeking some form of talks between the two sides as the first sign that a deal could be cut, before then monitoring progress towards such an agreement if one is to be made. Of course, the more likely a deal looks, the rosier the economic outlook becomes, and the more positive the outlook for crude. The opposite also being true," he said.