Oil prices pressured by supply and demand double whammy

Trade policy weighs on global demand

The most significant downward force on oil prices in recent months has come from softer global demand, driven largely by the United States’ increasingly aggressive trade stance. The so-called Liberation Day tariffs enacted by the Trump administration cast a shadow over the global growth outlook.

Markets grew increasingly concerned about a slowdown in industrial activity, particularly in major energy-consuming economies like China. As the world’s largest importer of oil, a slowdown in China’s economic activity has a disproportionately large effect on global demand. Although recent moves by the US to pause tariff hikes and re-engage in trade talks with China and other partners have partially eased those fears, sentiment remains cautious about future demand.

Investors are continuing to price in the impact of still elevated tariffs and the risk they weigh on manufacturing output and transportation activity.

OPEC ramps up supply

At the same time, OPEC has added to the downward pressure by increasing output. The cartel initially agreed to unwind voluntary production cuts that were implemented during the pandemic to stabilise the market. But a more significant boost in supply came when Saudi Arabia led a push to punish non-compliant members—namely Iraq and Kazakhstan—for exceeding their production quotas.

Rather than enforce stricter compliance, the group chose to effectively normalize higher output levels, further tipping the market into surplus. With demand under pressure and inventories already building, the decision has exacerbated the glut and added a bearish tilt to the oil price outlook.

The market reaction has been swift, with traders repricing expectations for a balanced market. Supply now clearly exceeds demand, and without a meaningful rebound in economic activity, there’s limited scope for near-term price recovery.

Iranian oil could add to the glut

Adding another layer of complexity is the growing prospect of a new nuclear agreement between the US and Iran. Following a diplomatic charm offensive by President Trump across the Middle East which has normalised or improved relations with Saudi Arabia, Qatar and Syria, Tehran appears more willing to come to the negotiating table. Talks reportedly centre on Iran agreeing to curb its nuclear ambitions in exchange for the lifting of economic sanctions—including those on oil exports.

A deal would pave the way for Iran to legally return to global oil markets, potentially bringing millions of barrels per day back into circulation. While timelines remain unclear, the mere possibility of increased Iranian supply has already put traders on edge.

With physical supply potentially increasing further, any incremental demand recovery will need to be substantial to soak up the additional barrels. Otherwise, prices risk remaining subdued for an extended period.

Outlook: Demand remains key swing factor

With supply conditions increasingly loose, attention now turns to whether demand can recover fast enough to restore balance to the market. This will largely depend on global trade dynamics, particularly the trajectory of US-China relations.

If the trade detente holds and leads to improved economic activity—especially across Asia and Europe—then oil prices could find a floor. But with OPEC stepping back from price support measures and the possibility of Iranian oil returning, the risks remain skewed to the downside.

For now, the trend in oil is clearly lower, and future volatility will likely hinge on the evolution of trade policy and geopolitical negotiations.

^{(Source: Trading View)}
(Past performance is not a reliable indicator of future results)