It has been a tumultuous week in oil markets. For the full context, it is helpful to go back to the first weeks of 2025 after Biden had announced sanctions on specific Russian oil carrying vessels just before departing from office. This pushed Brent up out of the narrow 70 to 76 \$/b area range it had inhabited for much of the last quarter of 2024. Since the start of Trump’s presidency, the market had been unsure how to price for the competing risks to the outlook for oil. On the one hand, tariffs on Canadian and Mexican energy, doubling down on efforts undermine Iranian production and possibly Russia too, could be bullish. On the other hand, the possible ending of the war in the Ukraine and tariffs applied to various trading partners, could lead to a trade war that would be negative for global economic growth and oil demand growth, would be negative for oil prices.
Since then, Trump’s call with Putin on 12thFebruary seemed to have been very cordial, especially when compared to subsequent frosty exchanges between Trump and President Zelensky and their extraordinarily confrontational press conference in the Oval Office when Zelensky visited the White House. Brent bounced along for a couple of weeks in a 74 to 77 \$/b range after Trump’s apparently Russia supportive stance on the conflict. Further evidence that bearish factors might prevail came from US data on Friday 21st which showed weakness in Purchasing Managers Indices and falling consumer confidence. This might be an early warning that uncertainty and disruption being brought about by Trump’s tariffs and Elon Musk’s DOGE, could be feeding through into domestic US economic weakness. The US stock market reacted negatively to this news on the day and fell further in the final week of February, especially after Nivida published its quarterly figures later that week. Brent tracked these moves lower down to a low of 72.39 $/b – a new low of the year.
In view of these uncertainties, OPEC+ had seemed to be preparing to delay the start of its planned, but already much delayed increase in output, for further a month, to the first of May or possibly later. So, it came as a surprise to markets on Monday that OPEC+ had decided to confirm it would go ahead with its planned increases after all ( click here for the press release on the OPEC website). Brent fell close to 71 \$/b as a consequence, brining it close to the crucial 70 \$/b area which had been a very important support level over the last 3-years.
Oil continued lower on Tuesday, briefly trading below 70 \$/b, tracking further falls in equity markets as Trump’s tariffs against Mexico, Canada and China came into force and China responded with retaliatory tariffs. The low of the week was reached on Wednesday at 68.33 \$/b, the lowest Brent has traded since December 2021. The oil markets recovered a little of its poise at the end of the week after Trump rolled back some of the tariffs on Mexico and Canada. He also said that he might impose further sanctions on Russia if Putin was not prepared to negotiate an end to the conflict, which could be positive for oil prices.
While Trump’s apparent willingness to show flexibility on tariffs is potentially positive, much damage to market confidence and the economy has already been done and this might not easily be reversed. There is mounting evidence that business confidence in the US has fallen, costs are higher and there are some nascent signs of rising unemployment. All of this has brought the extended rally in US equity markets up to the middle of last month and correspondingly optimistic company valuations, especially of tech firms, into a sharp focus.
Both oil and equity markets have fallen sharply of late and may experience a relief rally in the coming days. However, so long as Brent remains close to 70 \$/b, it is vulnerable to retesting this week’s lows close to 68 \$/b, with the possibility, if it does break lower, of reaching the 2021 lows around 65 \$/b. It could be that the main driver of oil markets in the coming weeks is sentiment in equities rather oil specific fundamentals.
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