Why are oil prices so volatile and where are they heading?

Trade war leads to concerns of reduced demand

The Kashagan offshore oil field in western Kazakhstan. The nation has indicated it doesn't want to slash production in order to prioritise national interests. Reuters

Oil prices have been extremely volatile in recent weeks and could drop further if Opec+ decides to boost supply when it meets early next month, analysts say.

Increased trade war concerns led by US tariffs and the possibility of a nuclear deal with Iran have led to fears about reduced demand and a supply glut.

Oil prices fell on Tuesday on demand concerns amid the ongoing trade tensions between China and the US, the world's two largest economies.

Brent, the benchmark for two thirds of the world's oil, was trading 1.05 per cent lower at $65.17 a barrel at 10.31am UAE time, while West Texas Intermediate, the gauge that tracks US crude, was down about 1 cent at $61.45 per barrel.

Oil’s quiet ascent since its tariff-induced trough on April 9 “has been stymied” by renewed concerns that Kazakhstan has defied Opec+ by prioritising national production targets over group quota levels, Japanese bank MUFG said on Thursday.

“This growing internal discord within Opec+ comes as oil bulls have been relishing on the recent risk-on mood reflecting easing Fed independence apprehensions, softer US rhetoric on China tariffs and a clearing of short positions in the midst of the first quarter’s earnings season,” it said.

Earlier this month, the producers group decided to add 411,000 barrels per day to the market in May, more than the 138,000 bpd initially planned, on expectations of a rise in demand.

The group will hold a meeting on May 5 to decide its output plans for June.

“Brent’s upside should remain capped as long as global trade tensions keep feeding demand-side fears,” Han Tan, chief market analyst at Exinity Group, told The National.

“Oil benchmarks could also sink to fresh four-year lows below $60 per barrel if Opec+ proceeds with yet another bumper-sized production hike in June.”

China uncertainty

The consistent uncertainty surrounding US-China trade tensions over tariffs has been a key driver for oil price volatility.

Last week, The Wall Street Journal reported that the White House was considering slashing steep tariffs on Chinese imports – in some cases by more than half – in a bid to de-escalate tensions with Beijing.

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US President Donald Trump is also reportedly considering tariff exemptions on car part imports from China, which could support oil prices.

However, the outlook remains bearish for now, analysts said.

“Oil prices face downward pressure as US talks with Iran, US tariffs, rising Opec+ supply projections and lowered oil demand estimates from the International Energy Agency and Opec create the perfect storm for low investor confidence,” Rystad Energy said in a recent note.

Opec this month slashed its oil demand forecast for 2025 to 1.3 million barrels per day, mainly due to tariff uncertainty.

The prolonged US-China trade war could cut China's oil demand growth in half this year to 90,000 barrels per day from 180,000 bpd, according to Rystad.

China is the world’s second-largest economy and a leading crude importer.

The progress in US and Iran nuclear talks are also affecting oil markets.

The two countries have concluded three rounds of talks so far and are expected to meet for a fourth round of negotiations this week.

If a deal is reached between the two countries, it could lead to a boost in supply from Iran on possible sanctions relief.

US measures to boost energy security

Meanwhile, the US Department of the Interior is also planning to issue emergency permits to accelerate the development of domestic energy resources including crude oil and critical minerals.

“We are cutting through unnecessary delays to fast-track the development of American energy and critical minerals – resources that are essential to our economy, our military readiness and our global competitiveness,” said Secretary of the Interior Doug Burgum last week.

“By reducing a multi-year permitting process down to just 28 days, the department will lead with urgency, resolve and a clear focus on strengthening the nation’s energy independence.”

Investment impact

Prolonged low oil prices could also hit investment in the energy sector, according to a report from Wood Mackenzie.

“If operators and the supply chain anticipate a period of prolonged low prices, it would send shockwaves through the industry," said Fraser McKay, the company's head of upstream analysis.

“This near-term uncertainty becomes an investment killer, precisely when the focus should be on potential long-term demand growth.”