Oil prices experienced a sharp decline as trade tensions between China and the US escalated.
Prices reached a four-year low on Wednesday, marking its worst five-day losing streak in three years.
“The main negative factor is concerns about a global recession triggered by the trade war, which would lead to a significant slowdown in oil demand,” Carsten Fritsch, commodity analyst at Commerzbank AG, said.
The six-month spread for Brent has dropped 86% from a high of $5.69 on January 15 to its lowest level since mid-November, 79 cents.
This collapse reflects a shift in market sentiment, moving from tightening supply and expectations of a revival in Chinese demand to a potential surplus.
At the time of writing, the price of Brent crude oil on the Intercontinental Exchange was at $61.15 per barrel, down 2.7% from the previous close.
West Texas Intermediate crude oil on the New York Mercantile Exchange was down 3% at $57.81 per barrel.
Tariffs likely to hit demand
Tariffs imposed by US President Donald Trump on Chinese goods increased by 50% on Wednesday, reaching 104%.
This escalation came after Beijing missed Trump’s Tuesday noon deadline to remove its 34% retaliatory tariffs on US goods.
China has refused to comply with what it perceives as US blackmail, despite Trump’s threat to impose additional tariffs if China did not lift its retaliatory measures.
Fritsch said:
In China in particular, oil consumption could be even weaker due to the exceptionally high tariffs.
China is the world’s largest importer of crude oil.
“China’s 50,000 bpd to 100,000 bpd of oil demand growth is at risk if the trade war continues for longer, however, a stronger stimulus to boost domestic consumption could mitigate the losses,” Ye Lin, vice president of oil commodity markets at Rystad Energy was quoted in a report by Reuters.
Demand for oil in the US is likely to fall due to expected countermeasures by other countries and higher inflation as a result of tariffs, even though lower oil prices could lead to lower gasoline prices and provide some relief.
Oversupply risks
As demand falters, supply of oil is set to rise substantially over the next few months.
The Organization of the Petroleum Exporting Countries and allies recently announced that the cartel would raise output by 411,000 barrels per day in May.
The surprising move dragged on sentiments in the market further as prices fell sharply last week.
OPEC will raise oil output by 135,000 barrels per day this month by unwinding some of its steep voluntary output cuts.
The market had expected a similar increase in May as well.
David Morrison, senior market analyst at Trade Nation said:
Given that there’s plenty of crude oil washing around the world, while demand growth has been repeatedly downgraded for over a year, then lower prices is the understandable result.
According to the International Energy Agency, the surplus in the oil market in 2025 is likely to be around 600,000 barrels per day this year.
With demand further weakening and supply set to rise further, the surplus is likely to increase.
This would be confirmed in the monthly report of IEA this month.
Bearish sentiment to dominate
Oil prices have fallen over 18% over the last three to four sessions.
“It’s fair to say that the bullish sentiment, which had been building from early March, was effectively crushed,” Morrison said.
The sell-off can easily be attributed to Trump’s larger-than-expected reciprocal tariffs.
Tariffs slow down trade, and increased costs are borne by importers – in this case, US buyers – and then passed on to US consumers, when possible.
The result is weaker consumer demand, leading to lower energy consumption and a drop in energy costs.
Source: DailyForex
However, the oversupply in the market remains a major concern in the absence of meaningful demand growth.
“At this point, I think you have to accept the fact that any rally (in WTI oil prices) that you run into at this point in time probably gets sold off,” Christopher Lewis, analyst at DailyForex, said in a report.
I think you’ve got a scenario where what you’re looking for is a little bit of a bump higher, some signs of exhaustion, and then maybe shorting it.
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