The plunge in oil prices following the twin shocks of President Donald Trump’s tariffs and the surprise boost in production from the Organization of the Petroleum Exporting Countries and allies (Opec+) has altered the global energy landscape with stunning speed.
Brent crude, the global benchmark, tumbled 13 per cent through Thursday (Apr 3) and Friday to just over US$66 a barrel, casting new doubts on Trump’s quest to aggressively boost US fossil fuel output and achieve “energy dominance”. Across the Atlantic, the sell-off is poised to ease soaring energy costs in Europe but also squeeze Middle Eastern petrostates.
Already the oil market is tossing aside expectations for 2025. Goldman Sachs, one of Wall Street’s long-standing crude bulls, cut its year-end price forecast on Thursday for Brent crude by US$5, to US$66 a barrel. Enverus has slashed more than a third from its demand-growth model. UBS, which at the start of the year forecast global demand would grow by 1.1 million barrels per day, is now cutting that up to nearly 50 per cent.
“The moment that President Trump put the tariffs that were hammering on Canada almost two months ago, we had already downgraded our forecast,” said Al Salazar, head of macro oil & gas research at Enverus. “The timing of the Opec announcement felt like them piling on.”
US oil futures settled near US$61 a barrel on Friday – well below the US$65 threshold that many companies need to profitably drill new wells in Texas and surrounding states, according to a recent survey by the Federal Reserve Bank of Dallas. The trade war, meanwhile, is driving up the price of the drilling equipment, with pipe costs rising about 30 per cent compared to levels before Trump imposed 25 per cent tariffs on steel last month.
The combination of lower oil prices and higher costs threaten to derail Trump’s push for US drillers to ramp up production.
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“I don’t think ‘drill, baby, drill’ was ever a near-term reality for US producers,” Leo Mariani, an analyst at Roth Capital Partners, said on Friday in a phone interview. “Now it’s not even a consideration.”
The S&P 500 Energy Index, comprised of US oil and gas companies, plunged 16 per cent on Thursday and Friday. Among the biggest decliners were APA, Diamondback Energy and Baker Hughes, which all fell more than 20 per cent.
Lower oil prices will, however, eventually bring down petrol prices, which would help accomplish Trump’s goal to cut US energy costs.
In Europe, the plunge in prices is welcome news. The tariffs sent gas there plunging to a six-month low on expectations that trade wars could cripple global energy demand and ease the market’s recent tightness.
Those lower prices bring relief to a region struggling to stockpile enough gas for next winter. If China’s economy slows, Europe is less likely to face competition to buy liquefied natural gas cargoes from the US and elsewhere.
One country to watch is Germany, which will need the most gas over the summer to fill its vast storage sites. Lower gas prices may help its ailing industries, already struggling since Russia’s war in Ukraine sent energy prices soaring.
In the Middle East, the pain that some Opec+ members face from lower prices is by design.
Saudi Arabia pushed to triple the production increase previously scheduled for May in an apparent bid to punish some of the group’s members – including Kazakhstan and Iraq – who were persistently flouting their output quotas.
The timing of the announcement – hours after Trump’s – seemed unlikely to be a coincidence. Officials in Washington and Riyadh held discussions in the days beforehand, according to a person familiar with the matter who asked not to be identified. Group delegates and crude traders alike speculated the Saudis deliberately sought to maximise the bearish effect.
It’s a risky gamble for Opec+. Many of its members require high oil prices to cover government spending. Saudi Arabia, for instance, needs oil above US$90 a barrel, according to the International Monetary Fund, and has already been forced to scale back investment in some of the projects at the heart of Crown Prince Mohammed bin Salman’s vision to transform the kingdom’s economy.
Iraq also needs prices above US$90 a barrel, while Kazakhstan needs more than US$115 a barrel, the IMF estimates.
Back in the US, it’s led shale investors to settle in to a harsh, new reality.
“You almost feel like this move from Opec was the additional driver to push people towards saying ‘Ok, now I really have to think about a sub-US$60 price’,” Josh Silverstein, a UBS analyst, said in an interview. BLOOMBERG
