Oil markets face downside volatility on tariffs, increased supply
A double whammy of demand threats from global tariff war and increased supply has opened up the way for considerable downside volatility in oil markets, analysts say.
'Premiums for downside protection have spiked to their widest levels since the pandemic. Time spreads has also shifted considerably. The 1-6 month spread in Brent futures has fallen from more than a $3 per barrel backwardation as the start of April to barely more than $1 per barrel now,' Edward Bell, acting group head of research and chief economist, Emirates NBD, wrote in a note.
Emirates NBD has downgraded its Brent oil price forecast to $68 per barrel, down from $73 per barrel previously while for WTI it now expects prices at an average of $65 per barrel, down from $71 per barrel previously.
Both the WTI and Brent curves are still someways from moving into contango but if demand fades substantially this year as a result of the trade dispute then curves are likely to fall out of the backwardation they have held for several years. 'Prices have recovered and downside premiums have narrowed following the announcement of a 90-day pause on widespread tariffs but the risk of further downside moves is high,' Bell said.
Oil markets are in flux in the wake of US President Donald Trump's whipsaw announcements on tariffs. Prices for Brent and WTI futures have tumbled since the start of April thanks to anxiety that a damaging global trade war will spark a major global slowdown and vastly reduce oil demand growth. Brent prices briefly moved below $60 per barrel on April 9, their lowest level since Q1 2021, in response to President Trump announcing more than 100% tariffs on imports from China. Prices have since recovered as the US has delayed tariffs on dozens of countries for 90 days though it has maintained high levies on Chinese goods.
At the same time that the US unveiled a substantial shift in its trading posture relative to the rest of the world, Opec+ announced on April 3 that it would bring forward some of its planned production increases. In a statement a day after the initial US reciprocal tariff announcement, those Opec+ countries that are contributing voluntary additional cuts said they will deliver three months' worth of production increases in May to enforce discipline with production targets or in their words providing over-producers 'an opportunity…to accelerate their compensation.' The
Several Opec+ national oil companies have also cut official selling prices in the past week, 'which may be an effort to preserve market share and could be an early warning of a price war', Bell said. ' market share battle is not a core assumption for oil markets this year but a disorderly breakdown of Opec+ is a real risk that could open much more downside for prices, he added.
'Our forecast for oil prices was that they would slide in 2025 on average relative to 2024 as we expected modest demand growth to fail to absorb supply additions from Opec+ as well as producers like the US, Canada and Guyana. There are more meaningful downside risks to demand this year as slowdown or recession fears build and we are now expect a steeper trajectory for oil prices on the way down.' Bell said.
The direct effect of tariffs on many of the GCC economies is relatively limited as at 10 per cent the rate is lower compared with the rate threatened and now paused for other US trading partners and overall exposure to the US in terms of export flows is largely dominated by oil and natural gas which are currently exempt from tariffs. 'However, our expectation of a lower oil price pathway this year means that fiscal and external positions across the GCC will be weaker,' Bell said.
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