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Welcome to Thoughts on the Market. I'm Martin Ratz, Morgan Stanley's global commodity strategist. Today on the podcast the uncertainty in the oil market and how it can play out for the rest of the year. It's Tuesday, April 29th at 3pm in London. Now, notwithstanding the energy transition, the cornerstone of the world's energy system is still the oil market. And in that market, the most important price is the one for Brent crude oil. Therefore, fluctuations in oil prices can have powerful ripple effects on various industries and sectors, as well as on the average consumer, who of course pays attention to gasoline prices at the pump. Now, with that in mind, we're asking the question, what's been happening in the global oil market recently? Earlier this month, Brent crude oil prices dropped sharply, falling 12.5% over just two trading sessions, from about $75 a barrel to close to $65 a barrel. That that was primarily driven by two factors. First, worries about the impact of trade wars on the global economy and therefore on oil demand after the Trump administration's announcement of reciprocal tariffs. Secondly was OPEC's announcement that notwithstanding all the demand uncertainty that this created, it would still accelerate supply growth, progressing not only with the planned production increases for May, but bring forward the planned production increases for June and July as well. Now you can imagine when OPEC releases extra production whilst the GDP outlook is weakening. Understandably, this weighs on the price of oil. Now, to put things into context, two day declines of 12.5% are rare. The Brent futures market was created in 1988 and since then this has only happened 24 times and 22 of those instances coincided with recessions. So therefore some commentators have taken the recent price dropped as a potential sign of an impending recession. Now, while brand prices have recovered slightly from these recent lows, they are still very volatile as they continue to reflect the ongoing trade concerns, the economic outlook, and also a strong outlook for supply growth from OPEC and non OPEC countries alike. The last few weeks have already seen unusually large speculator selling. So with that in mind, we suspect that oil prices will hold up in the near term. However, we still see potential for further headwinds later in the year. In our base case scenario, we expect the demand growth will slow down to approximately half a million barrels a day, year on year, by the second half of 2025. And that is down from an initial estimate earlier in the year when we were still forecasting about a million barrel a day of growth over the same period. Now, this slowdown, coupled with an increase in non OPEC And OPEC supply could result in an oversupply in the market of about a million barrels a day over the remainder of 2025. Now, with that outlook, we believe that Brent prices could eventually drop further down into the low 60s. That said, let's also consider a more bearish scenario. Oil demand has never grown continuously during recessions. So if tariffs and counter tariffs tip the economy into recession, oil demand growth could also fall to zero. In such a situation, the surplus we are currently modeling could be substantially larger, possibly north of 1.5 million barrels a day. Now, that would require non OPEC production to slow down more severely to balance the market. In that scenario, we estimate that Brent prices may need to fall into the mid-50s to create the necessary supply slowdown. On the flip side, there's also a bullish scenario where we and the market are all overestimating the demand impact. If oil demand doesn't slow down as much as we currently expect, and OPEC were to revert quite quickly back to managing the supply side again, then inventories would still build, but only slowly. In that case, Brent could actually return into the low 70s as well. All in all, we would suspect that the twin headwinds of higher than expected trade tariffs and faster than expected OPEC quota increases will continue to weigh on oil prices in months ahead. And so we have lowered our demand forecast for the second half of the year to just half a million barrel a day, year on year. And and we've also lowered our price forecast for 2026. We're now calling for $65 a barrel. That is $5 per barrel lower than we were forecasting before. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.
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