Oil prices have had their worst week since October 2023, with risk assets getting hit by US President Donald Trump’s reciprocal tariffs and the retaliation we have started to see towards them. China retaliated on Friday with a 34% tariff on all imports from the US. ICE Brent settled almost 11% lower last week to trade down to the mid-$60s. This weakness has only continued in early morning trading today, ING’s commodity experts Ewa Manthey and Warren Patterson note.
Market is pricing in a significant demand hit
“The scale of tariffs, combined with the decision from OPEC+, clearly took speculators by surprise. This is reflected in the ferocity of the sell-off in oil and the fact that speculators increased their net long ahead of the tariff announcement on 2 April. The latest positioning data shows that speculators increased their net long in ICE Brent by 56,112 lots to 318,182 lots as of last Tuesday. This move was driven by fresh longs entering the market. Clearly, they have since exited the market.”
“The scale of the sell-off suggests the market is pricing in a significant demand hit as recession fears grow. Current price levels imply a demand hit in the region of 1m b/d for the remainder of this year, which would leave oil demand flat year-on-year.”
“The move in the market is also likely to lead to a severe slowdown in drilling activity in the US. While Baker Hughes data shows that the oil rig count increased by five over the last week, this will quickly reverse at current price levels. The latest Dallas Fed Energy Survey shows that US producers need, on average, $65/bbl to profitably drill a new well, compared to a spot WTI price of a little over $60/bbl, while forward prices are sub-$60/bbl.”
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