[Global Focus] Oil Prices Plunge to Four-Year Lows... A Harbinger of Economic Recession?

Possibility of U.S. Tariff War Triggering Economic Slowdown
Concerns Over Recession and Increased Production Point to Prolonged Low Oil Prices
Wall Street Continues to Revise Oil Price Forecasts Downward

As the Trump-initiated tariff war intensifies, West Texas Intermediate (WTI) crude oil, which averaged $72 per barrel in the first quarter, plunged in early April and has remained in the low $60 range, fully reflecting concerns over an economic slowdown. If the U.S.-China trade dispute continues for an extended period, a decrease in global trade volume this year will be unavoidable, and the ongoing tariff war triggered by the Donald Trump administration is expected to exert downward pressure on oil demand. Growing uncertainty surrounding tariff policies is also raising concerns that corporate investment will contract. Major energy agencies are also revising their oil demand forecasts downward, reflecting the negative impact of trade conflicts on the economy.

Crude Oil Prices That Topped $80 Early This Year Fall Below $60 After Trump’s Tariff War

International oil prices, which briefly approached $80 per barrel at the beginning of the year due to the Biden administration’s final round of sanctions against Russia, have been on a steady decline since the start of Trump’s second term. At the start of this year, WTI set a record high, surpassing $80 per barrel on January 17. Brent crude also nearly reached $81 per barrel in mid-January. This was due to strengthened U.S. sanctions on Russian oil and concerns over global supply. However, after the U.S. announced reciprocal tariffs on April 2, international oil prices plummeted to their lowest levels since 2021.

On April 8, at the New York Mercantile Exchange, WTI closed at $59.58 per barrel, down $1.12 (1.85%) from the previous trading day. This is the first time in four years that WTI has fallen below $60, the last occurrence being on April 12, 2021 ($59.7), during the overlap of U.S.-China tensions and a COVID-19 resurgence. Brent crude, the global benchmark, also approached the $60 mark during the same period, settling at $62.82 per barrel. However, as President Donald Trump left room for negotiation by implementing a grace period for reciprocal tariffs, and with Iranian oil export sanctions also in play, WTI rebounded slightly to $64.01 on April 17.

Concerns Over Economic Recession and Weakening Demand Combine... Increased Production Further Drives Down International Oil Prices

Analysts say that the Trump administration’s tariff war is leading the decline in oil prices. Although the U.S. government has not applied reciprocal tariffs to petroleum products, there is growing concern that global economic contraction will weaken oil demand as long as tariff tensions persist.

In fact, the World Trade Organization (WTO) projects that, given the current U.S. tariffs and a 90-day grace period for reciprocal tariffs, global merchandise trade volume will decrease by -0.2% year-on-year, and if risks escalate, the decline could widen to as much as -1.5%. As the trade war prompts companies to scale back production and consumers to tighten their spending in response to higher prices, logistics and industrial activity may contract, leading to reduced oil demand. Since oil underpins most economic activities, including industry, transportation, and consumer goods, falling oil prices signal declining demand and, consequently, an economic slowdown. While lower oil prices can help ease inflationary pressures, such sharp declines are often interpreted as early warning signs of a recession.

The problem is that the U.S.-China tariff war is intensifying day by day. Not only the U.S., but also China’s economy could slow due to the fallout from the tariff conflict, leading to reduced oil demand. As the world’s largest oil importer and the so-called “factory of the world,” China’s economic health is critical. Goldman Sachs has revised its forecast for global oil demand growth in the fourth quarter of next year down to 900,000 barrels per day, citing the deepening U.S.-China trade war. Giovanni Staunovo, an analyst at UBS, said, “If the trade war escalates further, the risk scenario is that the U.S. recession will deepen and China will experience a hard landing,” adding, “In such a scenario, Brent crude prices could trade between $40 and $60 per barrel over the next few months.”

Rising uncertainty from tariff policies is likely to dampen investment. If corporate investment contracts, it could put further downward pressure on oil prices. When companies postpone new investments, industrial production slows and oil consumption stagnates. Additionally, if companies delay or cancel energy projects or infrastructure investments due to uncertainty, expectations for long-term energy demand will diminish, dragging down international oil prices. In fact, during the early stages of COVID-19 in 2020, heightened economic uncertainty halted global factory operations and air transport, causing oil demand to plummet and WTI to fall to as low as $37 per barrel.

The production increase policy of OPEC+ (a consultative group of OPEC members and non-OPEC countries), as well as increased output from non-OPEC nations, is also affecting oil prices. OPEC+, which produces more than half of the world’s oil, announced a surprise increase in production of 411,000 barrels per day starting in May. This move added further downward pressure to oil prices, which were already under strain from the impact of tariffs.

Oil Demand Forecasts Continue to Be Revised Downward... Growing Uncertainty Shakes Trump’s 'Energy Dominance'

Organizations including the International Energy Agency (IEA) are continuously lowering their forecasts for oil demand growth this year. In a recent report, the IEA projected that global oil demand growth this year would fall from 1.03 million barrels per day to 730,000 barrels per day, a reduction of 300,000 barrels. The forecast for next year was also revised downward to 690,000 barrels per day.

The IEA explained that this was due to escalating trade conflicts, stating that U.S. trade policy is creating uncertainty in the global oil market.

OPEC likewise expects average daily oil demand growth for this year and next year to be 1.3 million barrels per day, down by 150,000 barrels per day from previous estimates. OPEC analyzed that “recent changes in global trade relations have altered the outlook, and the intensification of tariff hikes between the U.S. and China has introduced new uncertainties.”

On Wall Street, oil price and demand forecasts are being revised downward. JP Morgan lowered its oil price forecasts for this year and next, citing increased OPEC+ production and weak demand. The bank cut its Brent crude forecast for this year from $73 to $66 per barrel, and for next year from $61 to $58. For WTI, the forecast was lowered from $69 to $62 per barrel this year, and from $57 to $52 next year. JP Morgan expects global oil demand to increase by 800,000 barrels per day this year, with demand rising by only 300,000 barrels per day in the third quarter.

JP Morgan stated, “If supply increases coincide with weakening demand, the supply-demand balance could shift to a significant surplus, causing Brent crude prices to fall below $60 per barrel by year-end.” The bank also said the probability of a mild recession is as high as 80%, and that if OPEC increases daily production by 1 million barrels, downward pressure on oil prices will intensify further.

UBS also lowered its Brent crude price forecast by $12 from its previous estimate, to $68 per barrel. BNP Paribas reduced its average Brent crude price outlook for this year and next from $65 to $58 per barrel. The U.S. Energy Information Administration (EIA) expects Brent crude to average $68 per barrel this year and $61 next year, down $13 and $19, respectively, from last year.

If the low oil price trend continues, there are concerns that President Trump’s push for “energy dominance” could be undermined. According to the Federal Reserve Bank of Dallas, U.S. companies need international oil prices to average at least $65 per barrel to justify drilling new wells. If oil prices remain low, energy companies will have little incentive to produce oil. President Trump, who championed the slogan “drill, baby, drill” and called for a revival of the oil industry, has in fact deepened the woes of the oil sector with his indiscriminate tariff barrage.

In this context, the Financial Times (FT) reported that in a March survey conducted by the Dallas Fed of 130 shale oil companies, about one-third of respondents said their business outlook had worsened since the end of last year. An executive at one company responded, “The chaos of the (Trump) administration is a disaster for commodity markets,” adding, “‘Drill, baby, drill’ is just a myth and nothing more than a slogan to agitate the public. The (President Trump’s) tariff policy is unpredictable and lacks a clear objective.”