Trade war causes oil prices to plummet

BarcelonaOn April 1, the price of a barrel of Brent crude, the European benchmark, stood at $74.95. On April 2, US President Donald Trump appeared on the White House lawn to announce the tariffs he was imposing on every nation in the world (although they are now suspended for 90 days, except for China), on what he called "liberation day." That same day, the price of oil began a steep decline, reaching its lowest point on April 8, when it stood at $62.82, a drop of more than 16% in just one week. Since then, the price of oil has hovered around $65 a barrel.

These are prices not seen since August 2021, when the world was still recovering from the COVID-19 pandemic and the war in Ukraine had not yet broken out. In other words, the trade war unleashed by Donald Trump has brought down the price of fossil fuels, which are still the most consumed in the world. However, within the geopolitical factors that influence the price of oil, the trade war is only the trigger for a series of decisions that are putting downward pressure on the price of crude oil.

One of these factors, evidently, is the fear that tariffs will slow the growth of the world's economies. The major economies of Europe—except Spain— are showing great weakness, especially Germany and France, which show little growth and, as a result of the trade war, could grow even less or even enter a recession. Many analysts also indicate that the United States economy, as a result of the Trump administration's economic policy, could be weakened, especially since the Federal Reserve (the Fed, the country's central bank) has halted rate cuts, which could affect consumption and investment and, in turn, reduce demand for oil.

To this factor must be added another important one. The Organization of the Petroleum Exporting Countries and its allies, including Russia, known as OPEC+, have decided to reverse the production cuts of the last two years and have announced that they will flood the market with crude oil. In fact, on April 3, just one day after the tariffs were announced, this oil cartel announced it would introduce an additional 411,000 barrels per day into the market starting in May, when the initial plan was to increase production by only 138,000 barrels. In other words, it will triple the initially planned production increase.

These additional barrels will enter the market just as OPEC itself, this week, said it expects a decline in oil demand. And the International Energy Agency, this same week, also revised its forecasts and anticipates that global crude oil growth will slow by 730,000 barrels per day in 2025, a reduction of 300,000 barrels from the previous forecast. A drastic drop that could worsen in 2026.

If a drop in demand is expected and OPEC+ reverses production cuts, what is the oil cartel seeking? Well, on the one hand, Russia needs to sell as much of its oil as possible—following the European embargo imposed due to the invasion of Ukraine—to other countries, as it needs money to meet the high cost of the war. For its part, Saudi Arabia also needs to sell as much crude oil as possible to meet its investment plans without harming its public finances. But, in addition, a low oil price also hurts the Trump administration in the midst of a trade war, in which Russia is allied with China.

Impact on fracking

Because we must remember that the United States is currently the world's leading producer of oil, but if the price of a barrel of Texas (WTI), the crude oil extracted using the method of fracking, If the oil company ceases to be profitable, many companies in the sector will be forced into bankruptcy, as happened during the pandemic, when the price of a barrel in the United States became negative. The United States is the world's leading producer of crude oil, with 19.63 mb/d in 2024, ahead of Russia (13.65 mb/d) and Saudi Arabia (9.02 mb/d).

In fact, shares of traditional oil companies have fallen in recent days, but those of oil companies have fallen much more. fracking such as Diamondback Energy or Devan Energy. In fact, the International Energy Agency itself warned this week of the danger facing these companies. These companies, according to the IEA, need an average price of $65 per barrel to make drilling new wells profitable. Furthermore, the agency says, tariffs that could make steel and equipment more expensive could further discourage drilling. The IEA concludes that "oil markets face a turbulent period of considerable uncertainty."