With all the turmoil in the global financial markets, oil prices have come under pressure not seen since the pandemic. Prices began their heavy slide last week and fell 18% to a four-year low, before recovering to $64/bbl, as Trump paused his reciprocal tariffs (except China) for 90 days. US trade policy was of course the primary driver, but perhaps most surprising of all, was the timing of OPEC+’s decision to accelerate production increases at a time when the demand outlook is turning increasingly bearish. Prices are likely to remain volatile as markets react to ever changing US trade policy, but for now remain significantly off where they began the year.
So, what might the implications of lower prices be? Firstly, it depends on how long prices stay low. Trump’s decision to pause reciprocal tariffs for 90 days may have helped prices find a floor for now, but with an escalating trade war against China, and 10% worldwide tariffs still in place, downside risk remains. Even with the latest pause (ironically) US production is most at risk from lower prices. Data from the Federal Bank of Dallas showed that US shale producers operating in the major Permian and Eagle Ford regions required around $61-62/bbl to be incentivized to drill new wells. As such, as older wells mature and enter decline, new wells may not be drilled to sustain production. The observed oil rig count fell by 9 week on week, the strongest decline since June 2023.
OPEC+ may also be forced to re-evaluate its production increases. Whilst the group is generally better placed to weather lower prices than US producers, most still require a high oil price to balance national budgets. As such, the group may not be willing to put oil prices under excessive pressure for a prolonged period. Lower prices can however stimulate demand. Major crude importers like China might be incentivized to build both commercial and strategic petroleum reserves (SPR) whilst prices are low, which in the near term could boost seaborne trade volumes. Lower prices could also offer an opportunity for Trump to fulfil his pledge to fill the SPR “right to the top” and give him scope to put further pressure on Iran and Venezuela. However, filling the US SPR would likely be negative for tanker demand, assuming domestic grades are used. Lower prices could also encourage consumers to boost oil consumption, although with a weaker economic outlook, the impact is likely to be countered by weaker industrial demand, job losses and reduced consumer spending.
Contango could also become a factor. Oil supply and demand balances have been pointing to an oversupplied market in 2025 for some time. Now, with demand facing significant headwinds, the odds of contango emerging have increased, even if not to the scale seen in 2020. Any hit to consumption would likely be slower and shallower than the pandemic and whether a contango would be steep enough to incentivize storing at sea remains to be seen. With global onshore oil inventories well below the five-year average, these inventories would likely fill first before floating storage becomes viable.
Lower prices will also reduce the barriers to trading with Russia. ESPO crude prices fell below the G7 price cap for the first time ever this week, which could allow Western shipowners/service providers to engage in Russian Far East crude exports, potentially sidelining some dark fleet vessels which have dominated the trade. Initial reports suggest that freight costs for dark fleet voyages on the Kozmino-North China route are already under pressure as a result.
Refining margins, which have remained relatively steady over the past week, could also face pressure if faced with weakened demand, prompting run cuts and perhaps even accelerating the closure of some older facilities for good.
For now, the physical market appears relatively unscathed, but for every week tariffs remain a threat, the demand outlook becomes increasingly bearish. The downside for tankers may not be immediate and could be punctuated by periods of high (and low) volatility as imbalances in supply and demand play out. If oil producers fail to adapt quickly enough to the changing demand landscape, then the upside volatility for tankers could be even greater. As is often said, the cure for low oil prices is low oil prices.
Data source: Gibson Shipbrokers