Oil prices have continued to tumble on Monday as recession fears have firmly gripped investors.
The escalating trade war between the US and China have stoked fears about a slowdown in the global economy, which is likely to severely impact demand for oil.
Goldman Sachs revised its oil price projections downward on Monday and predicted a 45% probability of a US recession within the next 12 months, according to media reports.
Last week, JPMorgan forecast a higher probability of recession, at 60%, in the US and globally.
“The scale of the sell-off (in the oil market) suggests the market is pricing in a significant demand hit as recession fears grow,” analysts at ING Group, said in a note.
ING analysts said:
Current price levels imply a demand hit in the region of 1m b/d (million barrels per day) for the remainder of this year, which would leave oil demand flat year-on-year.
At the time of writing, the price of West Texas Intermediate crude oil on the New York Mercantile Exchange was at $59.29 per barrel, down 4.4% from the previous close. The contract had hit a more than four-year low of $58.95 a barrel earlier in the day.
“Intraday outlook likely to be on the weaker side as prices cleared the stiff support of $60,” Geojit Financial Services said.
Brent crude oil on the Intercontinental Exchange was 4% lower at $63.01 per barrel. The contract hit a four-year low of $62.51 per barrel earlier today.
Demand hit from trade war
The ongoing trade war between the US and China is expected to lower fuel demand worldwide.
China’s increased tariffs on US goods escalated the trade war and heightened recession fears among investors, causing oil prices to plummet by 7% on Friday.
This follows a week of significant losses for both Brent and WTI, which fell by 10.9% and 10.6%, respectively.
Source: Daily Forex
China announced on Friday that it would impose additional levies of 34% on American goods in response to US President Donald Trump’s tariffs.
This confirmed investor fears that a full-blown global trade war has begun.
Although imports of oil, gas and refined products were given exemptions from Trump’s sweeping new tariffs, the policies could stoke inflation, slow economic growth and intensify trade disputes, weighing on oil prices.
For the oil market, analysts see demand destruction in the range of 1 million barrels per day.
Overall oil supply is projected to increase by 1.6 million barrels per day in 2025, according to estimates from the International Energy Agency.
The Paris-based energy agency had already expected global oil demand to be outstripped by 600,000 barrels a day this year.
However, experts believe that with increasing fears of a recession, particularly in the US and China, two of the biggest consumers of crude, demand could fall by 1 million barrels per day.
This could make the oversupply in the market even worse than previously anticipated.
Supply rising further
The above estimates do not take into account if OPEC decides to increase oil production further this year.
Last week, eight members of the OPEC+ group decided to raise oil output by 411,000 barrels per day for May in a surprising move, which caught investors off-guard.
Oil prices fell sharply as a result. According to Rystad Energy, more such production increases could follow over the next few months if US supply stagnates.
“The decision signals OPEC+’s confidence in the market’s ability to absorb additional supply, though it introduces new complexities given persistent macroeconomic uncertainties, fluctuating demand signals and geopolitical risks,” Mukesh Sahdev, global head of commodities market, oil at Rystad Energy, said in an emailed commentary.
According to Rystad Energy, OPEC could further increase oil production and accelerate the unwinding of the voluntary production cuts of 2.2 million barrels per day if US supply disruptions worsen.
The Norway-based energy intelligence company stated that the cartel has made an opportunistic move by boosting supply in May and taking advantage of the expected stagnation in non-OPEC production.
But, in the short term, this leaves oil prices vulnerable to further downside with demand weakening due to the trade war.
This also holds true as Saudi Arabia, the kingpin of OPEC, slashed the official selling price of Arab Light grade into Asia for May loading by $2.30 per barrel on Monday, the biggest cut since 2022.
Slowdown in US drilling
“The move in the market is also likely to lead to a severe slowdown in drilling activity in the US,” ING analysts added.
The increase of five oil rigs last week, as reported by Baker Hughes, will rapidly reverse itself given the current price levels.
The spot price for WTI crude oil is currently just above $60 per barrel, and future prices are below $60.
However, the most recent Dallas Fed Energy Survey indicates that US oil producers require an average price of $65 per barrel to profitably drill a new well.
ING analysts added:
A reversal in drilling in the US would mean it doesn’t take long to start seeing US oil production declining.
The annual decline in US Permian basin crude oil production from existing wells is slightly above 400,000 barrels per day.
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