Concern grows over how far oil price will fall in trade war

The tariff rollercoaster ride which US President Donald Trump has taken the global economy on over the past few weeks has had a significant impact on one key commodity in particular: oil.

While the price for the widely used Brent crude benchmark has been declining steadily since Donald Trump returned to office in mid-January, his Rose Garden "reciprocal"tariffs announcement of April 2 saw it plunge to its lowest level in four years. 

Brent crude was trading at close to $60 (€52.8) a barrel in recent days, a rate not seen since the COVID-19 pandemic severely impacted oil prices.

The retaliatory nature of the US-China trade war over tariffs is impacting global growth expectations while the general uncertainty around trade is weighing heavily on an oil price that was already under pressure.

"It is not just a question of abrupt policy and rate of tariffs, but the ongoing level of uncertainty and the tit-for-tat approach," says Carole Nakhle, CEO of energy consultancy Crystol Energy.

"Add to that the fact that this happened when oil demand was not booming while supply is plentiful, the result is the price levels we are currently seeing," she told DW.

OPEC+ shock

Another major development in global oil markets came the day after Trump's announcement, when the OPEC+ delivered a big shock. The loosely affiliated alliance of 12 OPEC members and 10 of the world's major non-OPEC oil-exporting nations said it was planning to dramatically ramp up supply in May.

Led by Saudi Arabia and Russia, OPEC+ has consistently limited output over the past decade to maintain high oil prices, and was widely expected to maintain that policy.

But experts believe the dramatic pivot is an attempt to reign in countries such as Kazakhstan and Iraq, which have flouted quotas by producing more than agreed.

Nakhle suspects noncompliant OPEC+ members have "exhausted the patience of the most disciplined members" because they've been "carrying the burden of the cuts" for some time.

Kazakhstan, for instance, has infuriated Saudi Arabia by increasing production at a new project at its Tengiz oil field, consistently producing above targets.

Meanwhile, Iraq has recently reduced output but has not made cuts it promised it would to make up for previous transgressions.

While the OPEC+ move has pushed down oil prices, hitting the revenues of  the likes of Kazakhstan and Iraq, the move will also ultimately negatively affect all members. 

Nakhle believes that suggests the alliance is ready for a longer-term, lower price environment on global oil markets. "OPEC+ believe...it would be better for some members, especially those who invested heavily in expanding their production capacity, to safeguard market share."

She also thinks the alliance may anticipate a fall in production from established producers such as Russia, Venezuela and Iran due to geopolitical factors such as sanctions and possible military action against Iran. "So the market can absorb the additional barrels without crashing prices," she said.

Worry in the Kremlin

Trump himself has touted falling oil prices as an apparent sign of his successful economic policies. He posted on the Truth Scial media platform he owns that "We have everything down at levels that nobody ever thought possible."

However, several analysts say the falling oil price is a sign of serious concern about the state of the global economy. Goldman Sachs said earlier this week that Brent crude could fall below $40 per barrel by late 2026 in an "extreme scenario."

For Russia in particular, the falling price could have profound economic and political implications. The country has largely been able to weather massive economic sanctions since the start of its invasion of Ukraine in February 2022 thanks to soaring oil prices boosting its revenues.

Experts have long suggested that plummeting oil prices could severely impact Russia's budgetary and spending plans and as a result, could force a rethink on its military campaign in Ukraine. 

Defense spending has more than tripled since 2021 and is set to be a record 13.5 trillion ruble ($122 billion, €102 billion) in the 2025 budget — another huge 25% hike. 

According to data compiled by news agency Reuters,  Russia's Urals benchmark oil price for cargoes loading from the ports of Primorsk, Ust-Luga and Novorossiisk fell to around $53 per barrel last week.

Chris Weafer, an investment adviser who has lived and worked in Russia for more than 25 years, told DW that if that rate continues or falls even further, it will force the Russian central bank to "significantly weaken the ruble" and will possibly also force the government to scale back its spending plans.

Weafer says that while oil no longer represents the share of Russian revenues it used to — dropping from around 50% a decade ago to around 30% today — a sustained drop in the oil price would have a major impact on all aspects of Kremlin policy.

Calling it a "very significant swing factor," Weafer said if oil receipts were to go down amid further falling prices, the government simply wouldn't have the "spare cash."

"Russia's financial position will look a lot less secure, perhaps within a year and that clearly could undermine Russia's ability to negotiate a deal in terms of Ukraine," he added.