Oil prices suddenly broke out of a months-long slumber last week to touch a three-year low. Now, traders are grappling with the question of whether the rout can run deeper.
A confluence of bearish factors has contributed to the worst crude-market sentiment in recent history. The Organization of the Petroleum Exporting Countries (Opec) and its allies made a surprise announcement of plans to boost supplies with crude trading near US$70 a barrel, a shift from the group’s prolonged, stoic defence of higher prices. At the same time, US President Donald Trump continues to menace America’s largest trade partners with an on-again, off-again trade war that threatens to sap demand.
Geopolitical risks are broadly cooling after Russia signalled a willingness to discuss a temporary truce in Ukraine for the first time since the war’s onset more than three years ago. All the while, China, the world’s top crude importer, has told refiners to pivot away from making mainstay fuels such as petrol and diesel, a sign of the shaky, long-term demand outlook.
Collectively, those factors helped briefly nudge benchmark Brent futures out of the US$70-85 band in which they have mostly traded since September. Speculators are wagering the slide isn’t over.
In another sign of mounting bearish sentiment, hedge funds reduced their gross long positions in West Texas Intermediate by 2,266 lots to 172,576, close to lows not seen since 2010, in the week ended Mar 4, according to the US Commodity Futures Trading Commission. Long-only bets on Brent were cut by 41,583 lots for the biggest raw-number decline since July, according to figures from ICE Futures Europe.
“Trump’s stance on energy markets has been clear: he’s pressuring Opec to increase production while simultaneously engaging in behind-the-scenes negotiations aimed at de-escalating the Russia-Ukraine conflict,” Cayler Capital, an oil-focused commodity trading adviser run by Brent Belote, wrote in a letter to investors seen by Bloomberg. “The net result? A bearish tilt in the oil sector, with prices drifting lower as uncertainty persists.”
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All of this is turning Wall Street more pessimistic.
Morgan Stanley now expects Brent crude to average US$70 this year, down US$5 from the previous forecast. Goldman Sachs sees risks of prices falling below their expected range of US$70-85. Meanwhile, JPMorgan Chase became the first to call for oil in the US$50s at an energy conference in London recently while Citigroup reiterated calls for US$60.
Easing premiums
Another red flag is shown in the price of Middle Eastern crude that had been one of the strongest corners of the oil market in the wake of US sanctions on Russian and Iranian barrels. Those values have collapsed relative to the regional Dubai benchmark as a clamour for cargoes to replace sanctioned supplies abates. The premium of Murban, a mainstay for Asian buyers, over Dubai also has narrowed.
China’s crude imports during the first two months of this year were down about 5 per cent from a year earlier. Iranian oil is being delivered to Chinese ports aboard smaller tankers amid mounting pressure from US sanctions.
“Sanctioned flows have continued largely unfazed as the initial disruption has failed to continue for a meaningful duration,” RBC Capital Markets analysts including Brian Leisen and Helima Croft wrote last week. “January’s disruption did in fact cause a physical impact and a change in crude buying behaviour, but as we’ve seen time and again since 2023, the shadow supply chain outperformed.”
At the same time, prices for lighter grades of crude have been persistently weak this year as production grows. Kazakhstan is set to ramp up oil exports this month after the expansion of one of the country’s largest fields. More supplies from outside of the Opec+ alliance are due to come online later in the year, with the International Energy Agency forecasting a surplus even before the group’s most recent move.
There are reasons to think there are limits to any further declines in oil, however.
The Trump administration is continuing to threaten a maximum policy on Iran, with Treasury Secretary Scott Bessent recently saying the aim is cut the regime’s oil flows by more than 90 per cent.
The US has already signalled plans to withdraw Chevron’s licence to pump and sell Venezuelan crude, a move that could potentially remove 200,000 barrels a day of crude from the market. The US is preparing to force more companies to stop working in Venezuela.
The looming threat of fresh flare-ups in the Israel-Hamas conflict amid a US administration more hawkish than its predecessor.
The US energy secretary is seeking US$20 billion to refill the Strategic Petroleum Reserve, a move that would effectively boost demand for barrels.
In addition, there’s the wider question of how far prices can fall before oil production is disrupted. At times last week, US crude for next year was trading in the low US$60s, a level not seen since 2023 that begins to menace output growth, traders and analysts said. Opec+ has also reiterated that its moves can be “paused or reversed subject to market conditions”.
“The only thing that can balance it all is maximum pressure on Iran, but we know Trump wants lower oil prices,” said Gary Ross, chief executive officer of Black Gold Investors. “It doesn’t look like maximum pressure is happening any time soon.”
So far, the fallout from Trump’s economic policies has seen equity markets fall roughly 6 per cent from a high less than three weeks ago. When US consumer confidence fell by the most since 2021 late last month, Brent futures slumped, one of the clearest signs that the de-stabilising impact of tariffs in wider financial markets is rippling through to crude.
That’s leaving oil’s next path at the behest of more than just supply policy. The next chapter for the commodity may entail an outsize focus on macroeconomic data out of the US and China, the world’s largest crude consumers, according to traders and analysts.
“Tariffs are bearish growth and folks worry about US growth now,” said Aldo Spanjer, a senior commodities desk strategist at BNP Paribas. “It’s a confirmation for all the bears out there. And any bull will not put a position on now.” BLOOMBERG
