Crude oil prices have dropped sharply, and the forces driving the decline suggest the market could have further to fall. Saudi Arabia’s recent decision to raise oil production, combined with rising global trade tensions, is pressuring both supply and demand in ways that risk deepening the downturn.
Last week, Saudi Arabia led an unexpected push to increase OPEC+ output—timed just hours before the U.S. announced a new round of tariffs. Whether the production boost was aimed at disciplining non-compliant members like Iraq and the UAE, or sending a signal to Washington, the effect was the same: a steep drop in prices, with Brent crude down more than 10%.
Geopolitics and Domestic Pressures Align
For now, both Riyadh and Washington appear comfortable with lower oil prices. The White House needs them to offset the inflationary pressure of its trade war, and Saudi Arabia has signaled no urgency to reverse course. This is not the all-out price war of 2020, when Riyadh’s clash with Moscow cratered markets. Instead, it resembles a targeted, lower-intensity campaign.
But therein lies the risk. In 2020, the sharp collapse in prices forced players back to the negotiating table quickly. This time, the pain is spread thinly—enough to hurt, but not enough to compel action. Countries already overproducing may simply pump more to compensate for revenue losses, undermining efforts to stabilize the market.
Demand Projections Look Overstated
On the demand side, the outlook is deteriorating. Forecasts for 2025 anticipate growth of over 1 million barrels per day, but those numbers look increasingly optimistic. If global trade tensions escalate and growth in key emerging markets slows, real demand growth could fall by a third—or even half.
Countries in Southeast Asia and China, many of which are now facing steep tariffs, drive a significant share of global oil consumption growth. A slowdown in these economies would disproportionately affect global demand.
Non-OPEC Supply Still Rising
Meanwhile, non-OPEC supply is still set to grow in the short term. New projects in Brazil, Guyana, Norway, and the Gulf of Mexico are already committed and will come online regardless of market conditions. That means rebalancing will fall disproportionately on U.S. shale producers.
Early signs suggest that process is beginning. Some shale firms have already received warnings from lenders to reduce drilling in order to avoid breaching loan covenants. According to the Dallas Fed, most shale producers require $65 per barrel to drill profitably. This week, West Texas Intermediate dropped below $60—and futures for 2026 have fallen to $58.
If current trends hold, the slowdown in shale growth will become evident by mid-year, though the global market will still face months of oversupply.
Market Psychology: Hedging Intensifies
The mood among oil traders is shifting fast. Volumes of put options on Brent crude have surged to all-time highs, reflecting an urgent push to hedge against deeper losses. With recent history still fresh—2014, 2020—few traders are willing to assume that prices have bottomed.
Unless there’s a coordinated response from producers or a reversal in trade policy, the market is headed into a period of prolonged imbalance. The fundamentals—and the psychology—point in one direction: lower.