Trade war and rising oil supplies weigh on crude prices
KUWAIT: Worries over the health of the global economy amid escalating trade protectionism together with an accelerated unwind of OPEC+ output cuts pushed Brent crude to a four-year low of $60/bbl in early May – though prices have risen off their lows. Responding to the weaker economic outlook, the IEA downgraded its 2025 oil demand growth projections to a multi-year low of 740 kb/d, which, in the context of faster OPEC+ supply increases and rising non-OPEC flows, risks a supply glut over the medium term.
This is the central downside risk to oil prices, signaled by weaker oil futures and a spate of downward price revisions by forecasting agencies. Providing some upside potential is the prospect of supply disruptions from more stringent US sanctions on Iran and Venezuela or a de-escalation in the global trade tariff conflict.
Largely unchanged in Q1,benchmark oil prices have dropped precipitously so far in Q2, after President Trump's 'Liberation Day' tariff deluge on US trading partners and OPEC+'s decision to accelerate the pace of its supply cut unwinding schedule. Brent fell to four-year lows in April, shedding 15 percent by the close of the month, the steepest monthly decline since November 2021, and then dropped further to $60.2 earlier in May. The marker has since struggled to break out of the low-to-mid-60s range, though President Trump's decision to slash tariffs on Chinese goods for 90-days did lift prices marginally.
Prices are now ranging around $64/bbl, caught between bearish sentiment linked to unexpected crude inventory builds in the US and a third consecutive month of schedule-busting OPEC+ supply hikes on the one hand, and falling US oil rig counts and pessimism surrounding the prospects for a new Iran nuclear deal that would satisfy both the US and Iran on the other. President Trump's 'maximum pressure' strategy vis-à-vis Iran and threat to impose even more stringent sanctions on the country's energy exports has been one of the few bullish impulses for oil prices and could puncture the negative sentiment that has befallen the oil market in 2025.
The pessimism has also been evident in the formation of a curious anomaly in Brent's forward curve: while the front end of the curve has been 'backwardated'(near-term prices higher than prices in the future), later month prices have shifted into a contango structure that see prices rising over earlier months. This so-called 'smiley' structure is fairly unprecedented and appears to signal that markets believe summer oil demand will be healthy enough to keep prices firm in the short term but insufficient to prevent a surplus and stock builds later on. And this is due to the potent combination of trade-tariff linked macroeconomic weakness and accelerating OPEC+ supply especially.
Meanwhile, the bullish speculator positions that had built up in Q1 quickly reversed in Q2 amid the spike in risk and uncertainty that followed April's tariff onslaught and OPEC+'s accelerated resupply timetable. 'Net length', the difference between the number of 'long' (betting on prices rising) and 'short' contracts (positions staked on prices falling) declined by 155,838 lots w/w in the week-ending 4 April, the sharpest drop in the available data. Net length has recovered slightly more recently as hedge funds view some upside risk in US-Iran nuclear talks failing to progress.
Growth at slowest
Near-term oil demand growth was revised sharply lower following the escalation of the trade war between the US and China. The International Energy Agency (IEA), taking its cue from the earlier downgrade by the IMF to global GDP growth in 2025 (and beyond), has lowered its forecast for oil demand growth this year to 740 kb/d and 760 kb/d in 2026. This is the weakest rate of growth since pandemic-affected 2020. The IEA pegs total oil demand at 105 mb/d in 2025.
OPEC lowered its demand growth forecast by a less severe 150 kb/d to 1.3 mb/d for both years. OPEC cites higher petrochemical production, solid road and air mobility as well as robust industrial activity in support of its more bullish oil demand growth projection compared to peers. This would also not be incongruous with its recent policy of fast-tracking the unwinding of members' voluntary supply cuts.
Despite broad demand-side worries, OPEC+ surprised the markets by accelerating the pace of unwind of 2.2 mb/d in voluntary output cuts by the 'OPEC-8' (which includes Saudi Arabia, Russia, Iraq, UAE, Kuwait, Kazakhstan, Algeria, and Oman) from 131 kb/d per month from April to 411kb/d in May and then again for both June and July. The move was ostensibly framed as a bid to 'punish' serial quota violators, such as Kazakhstan and Iraq, for failing to cut production in line with their quota obligations and compensatory cut promises. The Saudis hoped the fiscal discomfort of freefalling oil prices would bring about the discipline that has so far been absent among these overproducing members.
Part of the deal was that overproducing members would in good faith compensate for their non-compliance by cutting production according to a mutually agreed timetable thereby offsetting some of the supply that was about to be released. According to OPEC secondary sources, the average aggregate volume of OPEC-8 compensatory cuts required as 'payback' for members' overproduction from January 2024 to March 2025 is 305 kb/d, which would have easily offset the 131 kb/d of monthly incremental production OPEC-8 had originally planned.
This would have resulted in a de-facto output cut. That said, in April, the first month in the schedule that called for higher OPEC-8 supply, monthly supply gains from the group, at 23 kb/d, fell far short of the 131 kb/d that had been planned. Only four of the eight producers – Saudi, the UAE, Oman and Russia – increased production. Despite lowering output in April, Kazakhstan and Iraq were once again producing well above their respective quotas never mind honoring compensatory cut pledges.
Declaration of Cooperation(DOC) production (excluding quota-exempt Iran, Libya, Venezuela and Mexico) fell slightly in April to 30.0 mb/d (-17 kb/d). In the US, crude production hovered near record levels of 13.4 mb/d by mid-May, as per Energy Information Administration (EIA) data. (Chart 6).Following the plunge in oil prices and the downturn in global macroeconomic prospects, the EIA lowered its forecast for US crude oil output growth this year by nearly half to 208kb/d, the slowest rate of expansion since 2021.
For 2026, growth is expected to decelerate even further to just 82kb/d as producers pull back on activity amid lower oil prices. According to a Dallas Fed energy survey, the average breakeven price in the shale patch to drill a new oil well is around $65/bbl, several dollars above the current price of West Texas Intermediate. US shale firms have also been grappling with the challenges of rising gas-to-oil and water-to-oil ratios, which are straining infrastructure and raising operational costs. The EIA is projecting US crude oil production to peak in 2027at 14 mb/d, with shale oil production topping out at 10 mb/d before declining through to 2050.
The recent decline in oil prices is also weighing on broader non-DoC production, prompting downgrades to the outlook, though at an estimated 1.3 mb/d this year according to the IEA, supply growth is still well outpacing demand growth. This is being driven by higher production in Brazil, Guyana, and Canada as well as in the US. For 2026, however, the IEA sees non-DoC supply growth lagging demand growth, at 820 kb/d.
Market balance
Weaker oil demand prospects due to trade tariff-linked global macroeconomic headwinds and rising supply both from OPEC+ and non-OPEC+ producers, are weighing heavily on market sentiment and by extension oil prices. The fundamentals are signaling a loosening oil market that will shift from a slight supply deficit last year to a pronounced surplus in 2025.
The IEA estimates the 'call' on OPEC+ (the volume of OPEC+ crude needed to balance the market after accounting for demand and non-OPEC supply) to be in the region of 41.2 mb/d on average in 2025. OPEC+ was already pumping significantly above the IEA's estimate for the call in Q1 2025 (+800 kb/d) before the group decided to ramp up output in April. And the increase in OECD commercial crude stocks in March was beginning to reflect that. With OPEC-8seemingly pressing ahead with a more rapid resupply pace, that buffer will quickly erode.
Assuming no change to current OPEC-8 policy and no offsetting compensatory cuts, the entirety of 2023-2024's 2.2 mb/d of supply cuts would have been unwound by October 2025 (rather than the original late 2026), pushing the market into firm surplus territory, averaging 1.4 mb/d, according to our calculations. Risks to our standing oil price forecast of $70/bbl (2025 and 2026) are increasingly concentrated to the downside, barring significant supply-side geopolitical disruptions such as tighter Iran sanctions or, on the demand side, an upturn in global economic prospects, perhaps by a rolling back of trade tariffs.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Arab Times
9 hours ago
- Arab Times
Musk calls Trump's big tax break bill a ‘disgusting abomination,' testing his influence over GOP
WASHINGTON, June 4, (AP): Elon Musk blasted President Donald Trump's "big, beautiful bill" of tax breaks and spending cuts as a "disgusting abomination" on Tuesday, testing the limits of his political influence as he targeted the centerpiece of Republicans' legislative agenda. The broadside, which Musk issued on his social media platform X, came just days after the president gave him a celebratory Oval Office farewell that marked the end of his work for the administration, where he spearheaded the Department of Government Efficiency. "I'm sorry, but I just can't stand it anymore,' Musk posted on X. "This massive, outrageous, pork-filled Congressional spending bill is a disgusting abomination. Shame on those who voted for it: you know you did wrong. You know it.' The legislation, which has passed the House and is currently under debate in the Senate, would curtail subsidies that benefit Tesla, Musk's electric automaker. The tech billionaire followed his criticism with a threat aimed at Republicans. "In November next year, we fire all politicians who betrayed the American people,' he wrote in another X post. It's a sharp shift for Musk, the world's richest person, who spent at least $250 million supporting Trump's campaign last year. He previously pledged to help defeat Republican lawmakers deemed insufficiently loyal to Trump, but now he's suggesting voting them out if they advance the president's legislative priority. However, it's unclear how Musk will follow through on his criticism. He recently said he would spend "a lot less' on political campaigns, though he left the door open to political involvement "if I see a reason." The tech titan's missives could cause headaches for Republicans on Capitol Hill, who face conflicting demands from Trump and their party's wealthiest benefactor. Alex Conant, a Republican strategist, said "it's not helpful' to have Musk criticizing the legislation, but he doesn't expect lawmakers to side with Musk over Trump. "Senate Republicans are not going to let the tax cuts expire,' Conant said. "It just makes leadership's job that much harder to wrangle the holdouts.' Trump can change the outcome in Republican primaries with his endorsements, but Musk doesn't wield that level of influence, Conant said. "No matter what Elon Musk or anybody else says - and I don't want to diminish him because I don't think that's fair - it's still going to be second fiddle to President Trump,' said Republican West Virginia Sen. Shelley Moore Capito. Musk's business interests stand to take a hit if lawmakers approve Trump's bill, which would slash funding for electric vehicles and related technologies. Musk is the chief executive of Tesla, the nation's largest electric vehicle manufacturer, and SpaceX, which has massive defense contracts. Last month, Musk said he was "disappointed' by the spending bill, a much milder criticism than the broadside he leveled Tuesday. The budget package seeks to extend tax cuts approved in 2017, during Trump's first term at the White House, and add new ones he campaigned on. It also includes a massive buildup of $350 billion for border security, deportations and national security.
Kuwait Times
13 hours ago
- Kuwait Times
Global economy remains vulnerable to US tariffs
KUWAIT: The global economy remains vulnerable to US tariff policy with the recent US court developments injecting a new layer of uncertainty. In effect, as long as tariff cases are in front of the courts, not much progress can be expected in terms of US trade negotiations with trading partners. In the US, irrespective of court developments, the administration is sticking with its plans to impose tariffs, utilizing, if need be, other routes. In the Euro-zone, the ECB is set to cut rates again while the EU's trade negotiations with the US will likely be very difficult. In the UK, despite positive deal-making with the US/EU/India, the outlook is shaky amid limited policy support and global trade uncertainty. In Japan, soaring bond yields further complicate the BoJ's job and bring the public finances to the limelight. Finally, despite the recent heightened China-US tensions, a resumption of the de-escalatory bias between them will not be surprising. Irrespective of how the current tariff-related legal developments will unfold, the US administration will likely stick with its plans to impose tariffs, utilizing, if need be, several other routes. However, until the courts' final say on the current cases is clear, President Trump's bargaining power in his ongoing negotiations with the US's key trading partners is weakened substantially. Importantly, this means that not much can be expected from the US's trade negotiations with its main trading partners as long as the cases are in front of the courts. And while policy uncertainty has already been very high since Trump took office, another layer of court-related legal uncertainty has now been added. Court developments aside, a key date is July 9, which is the date when the pause on the 'reciprocal' tariffs would end. Earlier, the US and China had diffused their trade war, but negotiations have since stalled, and tensions re-escalated recently. While further escalation following the 90-day window is possible, we think the more plausible scenario is that a de-escalatory bias will resume as the world's two largest economies got a feel of the enormous economic damage that will ensue from a full-blown trade war. Meanwhile, the House passed the GOP's 'Big, Beautiful Bill', which is a step in the wrong direction given that it worsens an already unsustainable debt trajectory, although it is positive for economic growth in the short term. The bill is now in front of the Senate, where it is expected to undergo some amendments although it will very likely remain a debt-increasing bill. Meanwhile, GDP contracted in Q1 on tariff front-running, but the labor market remains broadly resilient with three-month average job gains at 155K/month. Hence, the Fed will likely remain in a wait-and-see mode while markets are currently pricing-in around two 25 bps rate cuts by year-end. In our view, a US recession will be avoided on condition that a major tariff escalation does not get re-ignited. The prior tariff de-escalation drove a V-shaped rebound in the S&P 500 index although the US dollar index remains 10 percent below a recent high reached in January. The Euro-zone economy started the year on a good note, growing by a higher-than-expected 0.3 percent q/q in Q1, strengthening from 0.2 percent in the previous quarter. Meanwhile, headline inflation is almost at target, standing at 2.2 percent y/y although further progress is needed in terms of core and services inflation. Nevertheless, more recent indicators are starting to reflect the tariff-related headwinds with the PMI dropping below 50 (49.5 in May) for the first time this year. The ECB has carried on with its easing policy, cutting rates seven times since June 2024, and near certain to cut again in its meeting this week. Despite the bank, back in March, dropping reference to their policy remaining 'restrictive', the futures market is still indicating additional one-to-two cuts in the second half of the year, reflecting the magnitude of the trade-related uncertainties ahead. Obviously, the EU's (US's largest trading partner) trade-related developments are a key factor shaping the outlook, especially following Trump's threat to hike the 'reciprocal' tariffs on the EU to 50 percent. Even if the courts upheld the initial ruling of blocking Trump's reciprocal tariffs, sectoral tariffs on autos and steel/aluminum (soon doubling) remain in place, while many other sectoral tariffs are in the pipeline, meaning that the Euro-zone will not be immune to further trade-related shocks. Irrespective of the court rulings, Trump's statements, on several occasions, exhibited high animosity towards the EU, which coupled with a high merchandise trade imbalance in favor of the EU, mean that US-EU negotiations will likely be very difficult. The structure of the EU, and its generally slow decision-making process, is another factor making these negotiations challenging. Having said that, EU officials have exhibited a strong preference not to escalate matters with the US. Notwithstanding an above-consensus GDP growth in Q1 (0.7 percent q/q), UK's outlook remains uninspiring as the rise came mainly on manufacturing and exports front-running US tariffs, while domestic consumption remained stagnant. The UK managed to strike a trade framework with the US, which should benefit UK auto exporters among others, but the 10 percent baseline tariff remained in place, the status of which is in front of the courts now. Talks are continuing to finalize details with still several key sticking points. In other positive developments, the UK successfully reset its post-Brexit trade ties with the EU and signed a long-awaited trade agreement with India. Despite these favorable trade-related developments, the Bank of England (BoE) warned of US' tariff policies and their indirect impact through disruptions to global supply chains. A continued subdued growth outlook would further pressure the public finances, noting that Chancellor Reeves, in March, had reduced some welfare and other spending items to help maintain her fiscal rule. Moreover, the hike in employers' national insurance contributions could continue to adversely impact employment levels. Accordingly, the BoE, in May, trimmed its growth forecast for the coming quarters, to only 0.1 percent q/q in Q2 and around 0.3 percent in Q3/Q4 while cutting the policy rate by 25 bps to 4.25 percent, but simultaneously guiding for 'a careful and gradual approach' and anticipating 'temporary' spikes in inflation over the coming months. CPI inflation jumped to a 15-month high of 3.5 percent y/y in April from 2.6 percent in March mainly on higher utility and other government fees, which the BoE does not expect to persist next year. Amid an uninspiring economic landscape but still elevated wage growth (5.6 percent y/y) and slow progress on services inflation (5.4 percent y/y), markets are currently pricing-in one to two 25 bps rate cuts by end-2025. Soaring bond yields in Japan further complicate BoJ's job and bring the public finances to the limelight. Japan's economy contracted by 0.2 percent q/q in Q1, its first decline in a year, driven by flattening consumption, a 0.6 percent q/q decrease in exports, and a sharp 2.9 percent rise in imports. Despite a robust 5.4 percent wage hike from the 2025 Shunto negotiations that built on a similar increase last year, real wages decreased in Q1, weighing on household spending while export performance deteriorated under the strain of US tariffs. Meanwhile, inflationary pressures continued with the core CPI (excluding fresh food) rising by 3.5 percent y/y in April, the highest since January 2023 with food inflation remaining particularly acute. In response to these challenges, the government recently rolled out a relief package worth JPY2.8 trillion ($20 billion) to support households grappling with the rising cost of living and to counter the negative impact of higher US tariffs. Trade negotiations with the US are continuing with the US-imposed 25 percent sectoral tariff on autos, a key sector for Japan, one of several important sticking points. Prime Minister Ishiba and President Trump are scheduled to meet in mid-June on the sidelines of the G7 meeting in Canada, and agreeing on some sort of a trade framework by then remains a possibility although a limited one given the court developments in the US. Meanwhile, increasing fiscal vulnerabilities coupled with the Bank of Japan's (BoJ) ongoing tapering of bond purchases have contributed to pushing long-term bond yields to multi-year highs. This is putting the BoJ in an even more difficult position, which has already been grappling with major growth headwinds and inflation that has exceeded target for around three years. The steep rise in bond yields will strain public finances, dampen growth, and risk delivering large losses to institutional investors' balance sheets. Despite the headwinds, the Chinese economy grew 5.4 percent y/y in Q1, beating expectations and the 'around 5 percent' government's growth target for 2025. Exports continue to be a main growth driver, surging by 12 percent and 8 percent y/y in March and April, respectively, easily beating expectations as lower exports to the US were more than compensated by higher exports elsewhere, especially to East Asian countries. The prior de-escalation with the US, although supposedly temporary given the 90-day window, was a major relief. In our view, China has emerged having the upper hand as, even before the recent court rulings in the US, and excluding the original 20 percent fentanyl-related deemed tariffs, US tariffs on Chinese imports stood at 10 percent, equal to the Chinese tariffs on US imports. Comparatively, almost all countries globally were slapped with that 10 percent baseline US tariff, that none had retaliated against. While renewed escalation following the 90-day window is possible (especially given the current stalled negotiations), we think the more plausible scenario is that a de-escalatory bias will resume, as mentioned before. Prior to the de-escalation with the US, overall sentiment weakened with the official PMI decreasing to 50.2 in April with the manufacturing PMI falling to a 16-month low of 49.0, before both improved slightly in May. Meanwhile, domestic demand remains muted with CPI inflation in negative territory for the third straight month in April and the PPI in deflation for more than 2.5 years. Given the headwinds, the central bank eased policy in May, cutting several of its policy rates and the reserve requirement ratio, among other measures taken. Looking ahead, while a stronger fiscal and monetary policy support may be forthcoming, a sustained de-escalatory stance with the US will lower the scale of such support.
Kuwait Times
21 hours ago
- Kuwait Times
Outgoing Chinese envoy praises growth in China-Kuwait ties
KUWAIT: The Chinese embassy in Kuwait hosted a farewell reception on Monday in honor of the outgoing Chinese Ambassador. During his speech, Chinese Ambassador to Kuwait Zhang Jianwei expressed his deep appreciation to Kuwaiti leadership, officials, and people as he concluded his diplomatic mission after three years of service, highlighting the remarkable development in China-Kuwait relations and the warmth of the Kuwaiti society. Ambassador Jianwei shared that his arrival in Kuwait on May 22, 2022, marked the beginning of a significant and unforgettable chapter in his diplomatic career. 'Over the past three years, I had the pleasure of witnessing Kuwait's remarkable journey toward progress under the wise leadership of His Highness the Amir Sheikh Meshal Al-Ahmad Al-Jaber Al-Sabah. The New Kuwait 2035 Vision has achieved tremendous success across multiple sectors, elevating Kuwait's regional and international standing,' he said. Regarding Kuwait's cultural richness, he said: 'From the majestic Grand Mosque to the vibrant Souq Al-Mubarakiya, from traditional Sadu weaving to modern architectural marvels like Al Hamra Tower and the Sheikh Jaber Al-Ahmad Cultural Centre, the blend of heritage and modernity left a deep impression on me.' The Ambassador highlighted key accomplishments during his term, adding that there were two meetings between Chinese President Xi Jinping and HH the Amir Sheikh Meshal that fostered strategic alignment. On economic cooperation, he mentioned that China remained Kuwait's largest trading partner for 10 consecutive years, explaining: 'Substantial progress was achieved in landmark ventures such as Mubarak Al-Kabeer Port and renewable energy initiatives.' He noted that the first Chinese Cultural Center in the Gulf was established in Kuwait during his tenure, and exchanges among students, academics, media and youth increased. The ambassador also welcomed the recent Chinese decision to grant visa exemptions to Kuwaiti passport holders, saying: 'We warmly welcome more Kuwaiti friends to explore China.' Concluding his remarks, the Chinese Ambassador affirmed his confidence in the bright future of China-Kuwait relations and pledged to continue promoting this enduring friendship wherever he goes.
