Oil prices crash amid trade war escalation, recession fears

08/04/2025 00:15 AST

Oil prices plummeted over 3.0 per cent on Monday, extending a steep decline from last week, as intensifying trade tensions between the US and China fuelled fears of a global recession and weakened demand for crude.

Brent futures fell $2.28, or 3.5 per cent, to settle at $63.30 per barrel by 0049 GMT, while US West Texas Intermediate (WTI) crude futures dropped $2.20, or 3.6 per cent, to $59.79.

Both benchmarks touched their lowest levels since April 2021 during the session, reflecting a broader market unease. The latest sell-off follows a bruising week where Brent lost 10.9 per cent and WTI shed 10.6 per cent, triggered by China's retaliatory tariffs on US goods last Friday.

Beijing announced additional levies of up to 34 per cent on American products in response to President Donald Trump's sweeping tariff hikes, escalating a trade war that has rattled investors.

The tit-for-tat measures have heightened the risk of a global economic slowdown, with oil demand projections now under scrutiny. Adding to the bearish sentiment, Saudi Arabia, a key player in the Opec+ alliance, slashed the price of its flagship Arab Light crude by $2.30 per barrel for May deliveries to Asia - its steepest cut in over two years.

The move by state-owned Saudi Aramco came on the heels of Opec+'s surprise decision to boost output significantly, amplifying oversupply concerns. Oil market analysts said the oil is caught in a tug-of-war between supply glut fears and demand erosion as trade disputes deepen and Opec+ navigates its next moves. With economic indicators flashing warning signs, investors and traders alike are bracing for volatility in the weeks ahead, they warned.

"The combination of trade war escalation and Opec+'s production hike has created a perfect storm for oil prices," said Satoru Yoshida, a commodity analyst at Rakuten Securities. "Tariffs are stoking fears of weaker global growth, while the planned supply increase adds downward pressure."

Monday's price drop erased gains from earlier in the year, with Brent now down 15 per cent year-to-date and WTI off 18 per cent. The US Energy Information Administration (EIA) reported last week that US crude inventories rose by 3.2 million barrels, exceeding analyst expectations of a 1.5-million-barrel build.

Meanwhile, global oil demand growth forecasts have been revised downward. The International Energy Agency (IEA) now projects demand to grow by just 1.1 million barrels per day (bpd) in 2025, a 200,000-bpd cut from prior estimates, citing economic headwinds. Yoshida warned that WTI could test $55 or even $50 if stock markets continue their slide, a scenario bolstered by Monday's 2.0 per cent drop in the S&P 500.

"The correlation between equity markets and oil prices is tightening as recession fears grow," he noted. "Retaliatory tariffs from other nations beyond China will be a critical wildcard to monitor."

Federal Reserve Chair Jerome Powell weighed in on Friday, calling Trump's latest tariffs "larger than expected" and warning of broader economic fallout, including higher inflation and slower growth. Although oil, gas, and refined products were exempted from the new US tariffs, the policies could still indirectly hammer demand by raising costs across industries and curbing consumer spending.

"Inflationary pressures from tariffs could force central banks to tighten policy, further choking economic activity and oil consumption," said Emily Carter, an energy economist at Barclays. On the supply side, Opec+ ministers met over the weekend, urging members to fully comply with output targets. The group demanded that overproducers submit compensation plans by April 15 for exceeding quotas, signaling internal pressure to stabilise markets. However, the alliance's decision to ramp up production-estimated at an additional 500,000 bpd-has drawn skepticism. "Opec+ is walking a tightrope," Carter added.

"They're trying to defend market share, but flooding the market amid weakening demand could backfire." Looking ahead, oil prices face a precarious outlook. Analysts at Goldman Sachs revised their 2025 Brent forecast to $70 per barrel, down from $75, citing trade war risks and supply dynamics. However, they noted potential upside if geopolitical tensions flare in oil-producing regions or if demand surprises to the upside. For now, the market remains tilted bearish.

"The $60 level for Brent and $55 for WTI are key support zones to watch," Yoshida said. "A break below could trigger further liquidation."

Khaleej Times