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.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Arabian Post
2 hours ago
- Arabian Post
U.S.-China Trade Talks In London Form The Basis Of Early Agreement On Contentious Issues
By Nitya Chakraborty The high level delegations of United States of America and China concluded their two day trade talks in London on Tuesday agreeing to take forward the course of negotiations for further promoting steady and healthy development of economic and trade ties between the two largest economies of the world. Both Chinese and U.S. sources underlined that the London talks were based on the guidelines set through phone conversations between President Trump and President Xi Jinping on June 5 as also the understanding arrived at the earlier meeting in Geneva last month. In fact following the Geneva meeting last month, the Chinese side made lot of complaints that the U.S, agencies have been violating many of the principles agreed to at the Geneva meeting and this was hampering the proper implementation of the Geneva understanding. Chinese President's office communicated this to the President Trump's office and finally Trump spoke directly to President Xi Jinping on June 5 and discussed a few guidelines for trade discussions scheduled in London on June 9 and 10. Now this London agreement based on that June 5 guidelines set by the two Presidents will be taken forward for further finetuning at the next meeting to be scheduled soon. U.S. sources say that the areas of discussions are so vast and the items are so many that a full fledged deal will take a few more sources have hinted that the Trump administration is really keen in arriving at an early deal with China. So, the U.S. side will abide by the London agreement in the interests of normal trade relations between both the countries. According to a latest survey released by the American Chamber of Commerce in China, although tariffs pose rising challenges to US companies in China, most companies are not planning to exit China, with none reporting shifting production back to the US. Chinese sources say that China is maintaining strategic patience in talks with the U.S. officials as there are some structural trade conflicts and these require time consuming discussions. On Monday morning, China released the trade data for the first five months of 2025. China's total goods imports and exports in yuan-denominated terms rose to 17.94 trillion yuan ($2.5 trillion) in the first five months of 2025, up 2.5 percent year-on-year, official data showed Monday. The continuous growth in foreign trade underscores the resilience of the world's second largest economy, with supply chain and industry chain remaining competitive in response to the world market demand, despite global headwinds highlighted by unilateralism, a Chinese expert said. 'Since the beginning of this year, China's economy has continued to recover and improve. Under external pressure, the country's goods trade has maintained strong resilience. By May, China's imports and exports continued their growth trend, with the growth rate accelerating notably after the high-level China-US economic and trade talks,' said Lü Daliang, a GAC spokesperson, Xinhua reported on Monday While China's foreign trade generally saw a positive growth, uncertainties remain, as reflected in some trade figures. Media reported that last month, goods exports rose 6.3 percent year on year, while imports went down 2.1 percent. China-US trade decreased by 8.1 per cent year on year basis to1.72 trillion yuan during the first five months of 2025, according to Chinese customs data. Li Changan, a professor at the Academy of China Open Economy Studies at the University of International Business and Economics, told the Global Times on Monday that data from May shows that while China's foreign trade remained generally stable, some fluctuations did occur, likely linked to the trade tensions. 'China's import and export growth accelerated significantly following recent high level trade talks between China and the US in Geneva. This suggests a rebound in foreign trade after the joint statement, partially offsetting the negative impact of the trade dispute and helping maintain overall trade stability,' Li said, adding that challenges persist as businesses expect more predictability in world trade. The trend in China-US trade data was 'expected,' as even though China and the US reached an agreement to significantly reduce reciprocal tariffs during the Geneva talks in May, US tariffs on Chinese goods remain high, prompting Chinese foreign trade companies to made adjustments by exploring alternative markets to reduce their reliance on the US, Huo Jianguo, a vice chairman of the China Society for World Trade Organization Studies in Beijing, told the Global Times on Monday. The United States and China have a substantial trade relationship, with China being a major trading partner and a significant export market for the US. In 2024, total US-China trade in goods reached an estimated $582.4 billion, with US exports to China at $143.5 billion and imports from China at $438.9 billion, resulting in a trade deficit of $295.4 billion. China is the third-largest export market for the US, behind Canada and Mexico. It is interesting that Chinese policy makers are making special efforts to woo the European Union in both political and trade areas by taking advantage of the current fissures in US-EU relations. The idea is to project China as a defender of multilateral trading as also WTO norms as against the unilateralism being followed by the US President Donald Trump. However, there have been many setbacks to China-EU relations also. This month, the EU has taken steps to restrict Chinese medical devices from participating in its public procurement market, which was firmly opposed by the Chinese side. Recently, negative hype against China has increased in Europe. Following the 'China spy' case and the so-called lobbying scandal related to Huawei, the Czech Republic openly accused China of launching a cyberattack against it, and the EU and NATO followed suit. Even after a major power outage in Europe, solar power inverters produced in China were questioned by some for 'cybersecurity risks.' In the recent days, China and Europe have conducted intensive diplomatic interactions. President Xi Jinping spoke with French President Emmanuel Macron and German Chancellor Friedrich Merz respectively, Vice Premiers He Lifeng and Liu Guozhong visited Europe successively, the Danish and Dutch foreign ministers visited China successively, and Foreign Minister Wang Yi spoke with the German and Polish foreign ministers. Vice Premier He Lifeng is currently in London on an official visit to the UK. He will be having intensive discussions on trade and political issues with the British Prime Minister Keir Starmer. The European Parliament and China have decided to simultaneously and comprehensively lift restrictions on mutual exchanges, further sending a positive signal for expanding exchanges between the two sides. It's reported that European Council President Antonio Costa and European Commission President Ursula von der Leyen will also visit China in July to hold meetings with Chinese leaders. Chinese experts say that such setbacks are not unexpected taking into account the policies of EU members but still cooperation and collaboration are possible. China is interested in that. Over the past 50 years since establishing diplomatic relations, China and the EU have formed a strong economic symbiotic relationship, with annual trade increasing from $2.4 billion to $785.8 billion – a growth of over 300 times. Both sides have engaged in productive multilateral coordination and cooperation in areas such as climate change. Both Chinese and EU sources say these collaborations have not only brought tangible benefits to nearly 2 billion people on both sides but have also made significant contributions to maintaining global stability and prosperity. In the current complex international situation, the China-EU relationship holds even greater strategic significance and global influence. The Chinese perception is that the development of China-EU relations demonstrates that the two sides can fully respect each other, engage in equal dialogue, complement each other's strengths, and achieve mutual success. The world is changing, but the fundamental fact that cooperation between China and the EU far outweighs competition, that consensus far exceeds differences, and that opportunities far exceed risks remains unchanged. (IPA Service)
Gulf Today
4 hours ago
- Gulf Today
Oil prices climb to 2-month high on US, China trade agreement
Oil prices rose 2% on Wednesday, to their highest in more than two months, as President Donald Trump said the US had a trade deal with China, feeding hopes for the outlook for energy demand in the world's two largest economies. Brent crude futures rose $1.32, or 1.97%, to $68.19 a barrel at 11:35 a.m. EDT (1535 GMT). US West Texas Intermediate crude was up $1.51, or 2.32%, to $66.49. Both Brent and WTI reached their highest in more than two months. Trump said Beijing would supply magnets and rare earth minerals and the US will allow Chinese students in its colleges and universities. Trump added the deal is subject to final approval by him and President Xi Jinping. The trade-related downside risk in oil has been temporarily removed, although the market reaction has been tepid as it is not clear how economic growth and global oil demand will be affected, PVM analyst Tamas Varga said. Trump said he was less confident that Iran would agree to stop uranium enrichment in a nuclear deal with Washington, according to an interview released on Wednesday. In the US, crude inventories fell by 3.6 million barrels to 432.4 million barrels last week, the Energy Information Administration said on Wednesday. Analysts polled by Reuters had expected a draw of 2 million barrels. "It's a bullish report," said Bob Yawger, director of energy futures at Mizuho, adding that the demand for motor gasoline began to strengthen. Product supplied for motor gasoline, a proxy for demand, rose by about 907,000 barrels per day last week, to 9.17 million bpd. US consumer prices increased less than expected in May, deepening the conviction in financial markets that the Federal Reserve will start cutting interest rates by September. Lower interest rates can spur economic growth and demand for oil. Wall Street stocks gained and the dollar and US Treasury yields dipped on Wednesday after President Donald Trump said a U.S.-China trade deal was done and a fresh report on US consumer prices in May showed only a marginal increase. A White House official said the agreement with China allows the US to charge a 55% tariff on imported Chinese goods, including a 10% baseline "reciprocal" tariff, a 20% tariff for fentanyl trafficking and a 25% tariff reflecting pre-existing tariffs. China would charge a 10% tariff on US imports, the official said. Trump also said that Beijing would supply magnets and rare earth minerals while the US will allow Chinese students in its colleges and universities. Separately, the Consumer Price Index (CPI) increased 0.1% in May amid cheaper gasoline after rising 0.2% in April, the US labour Department said on Wednesday, but inflation is expected to accelerate in the coming months on the back of the Trump administration's import tariffs. Chris Zaccarelli, chief investment officer for Northlight Asset Management in Charlotte, said the likely US China trade deal and consumer price data should support markets. "The narrative around tariff-induced inflation should subside," he wrote in an email. "We are still cautious, but many of the risks that were present in early April appear to be receding." The Dow Jones Industrial Average gained 0.4%, the S&P 500 advanced 0.3%, and the Nasdaq Composite rose 0.4%. Tesla shares added about 2% after Elon Musk also said he regretted some of the posts he made last week about Trump, opening the way to a healing of an abrupt rift that has roiled Washington and hurt shares in the electric carmaker. Asian shares were slightly more positive, with MSCI's broadest index of Asia-Pacific shares outside Japan up 0.65%, while the STOXX benchmark for major European shares were little changed. AUCTION ANGST: The reaction in currency markets was muted, with the dollar weakening slightly against the Japanese yen to trade at 144.83 . The euro edged up 0.46% to $1.147, nudging the dollar index down 0.24% to 98.72. Ten-year Treasury yields fell 3.4 basis points to 4.44%, but bond investors also waited for an auction of $39 billion in 10-year notes later in the day, anxious to see if foreign buyers turn up. Concerns about huge US budget deficits and debt have combined with unease over the White House's shifting policies to make investors demand a higher term premium for holding Treasuries. Following the consumer pricing data, traders of short-term interest-rate futures priced in a 70% chance of a quarter-point reduction in the Fed policy rate by September, compared with 57% earlier. Policymakers are widely expected to keep rates unchanged next week.. "Another month goes by with little evidence of tariffs, but the longer-term inflation challenge they pose remains," Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, wrote in an email. "Given the Fed likely shares that outlook, no one should be looking for rate cuts in the near future." In commodity markets, gold gained 0.5% to $3,337 an ounce . Oil prices rose to a seven-week high as markets assessed the outcome of the U.S.-China trade talks. US crude rose 2% to $66.30 a barrel and Brent rose to $68.04 per barrel, up 1.75% on the day. Agencies
The National
5 hours ago
- The National
Oil prices jump 4% on rising Middle East tension
Oil prices rose more than 4 per cent on Wednesday as the US was preparing to evacuate non-essential staff from its embassy in Baghdad amid rising regional tension. Brent crude futures rose $1.96, or 3.02 per cent, to $66.82 per barrel. West Texas Intermediate crude gained $2.93, or 4.51 per cent, to $67.90 per barrel at 4pm ET. 'It's so fragile. If you see any aberration like that, it doesn't surprise me at all you see volatility in oil prices,' said Peter Andersen, founder of Andersen Capital Management in Boston. The US State Department said it was preparing to evacuate non-essential staff in its embassy in Iraq, Opec's second-largest producer of crude oil behind Saudi Arabia. Non-essential staff members and family members were also authorised to leave Bahrain and Kuwait, according to reports. Tension in the region flared up on Wednesday as efforts between the US and Iran to reach a nuclear deal appeared to stall. In an interview with the New York Post published on Wednesday, President Donald Trump said he was getting 'less confident' about the prospects of a deal being reached. Mr Trump had previously expressed hope that the two sides could reach a deal, and a sixth round of talks were scheduled to take place in Oman on Thursday. 'Something happened to them, but I am much less confident of a deal being made,' he told the Post. Mr Trump added Tehran will not have a 'new nuclear weapon' regardless if a deal is reached. Matthew Bey, a senior global analyst at the Rane Network in Austin, said Mr Trump's comments are 'only reinforcing fears that nuclear talks may soon fall apart'. 'The likelihood of a US-Iran nuclear deal, even a temporary one, has declined in recent days as the White House has hardened its demand on Iran having to give up the right to enrich uranium and Iran has demonstrated little willingness to do so,' Mr Bey told The National in an email. Iran's Minister of Defence Aziz Nasirzadeh had also said on Wednesday that Tehran will strike US bases in the Middle East if nuclear talks fail and conflict arises. Major indexes on Wall Street wavered aftedr developments in the region, as investors continued to assess the prospects of a US-China trade truce and tame inflation data. The Dow Jones Industrial Average was virtually flat, losing 1.1 points at the closing bell. The S&P 500 and Nasdaq Composite both closed 0.27 and 0.50 per cent lower, respectively. 'Given such uncertainty in the markets right now we tend to defer being negative when we can't understand this stuff. There's a handshake deal, but it's a long way off from an actual deal,' Mr Andersen said.
