By Samer Hasn, Senior Market Analyst at XS.com
Oil prices continue to decline for the second day in a row, falling by more than 0.5% across both Brent and WTI crudes, and are close to erasing all gains recorded in January.
Oil’s losses come with a set of negative factors that are likely to exacerbate concerns about either oversupply or falling demand for crude, keeping prices under continued downward pressure.
Today, we saw more bleak economic data from the Eurozone, where the region did not grow in the last quarter of last year compared to the third quarter, and its largest economies, Germany and France, contracted by 0.2% and 0.1%, respectively. All these readings were worse than expected. These figures come this week after the results of the GfK Consumer Climate survey in Germany, which also showed a decline in economic expectations and income expectations among individuals.
These economic difficulties may be exacerbated by the return to the trade war with the imposition of tariffs by the United States, which may ultimately contribute to keeping the prospects for growth in demand for crude oil dim, keeping prices under pressure.
The tariffs will also include Chinese exports to the United States, albeit to a lesser extent than Donald Trump previously threatened during his election campaign. However, I do not rule out increasing these tariffs if the upcoming negotiations between the two poles do not reach an agreement on trade terms.
So far, we have witnessed a series of positive steps from United States and China that have eased concerns about tariffs. However, the shock caused by the Chinese artificial intelligence product DeepSeek may be an escalating factor in tensions between the two countries as it threatens US dominance in that field.
This potential tension may not be evident yet after the DeepSeek shock, but what has already been evident in the oil market are concerns about re-accelerating the shift towards renewable energy sources to keep pace with the needs of the artificial intelligence infrastructure. According to The Wall Street Journal, the DeepSeek spike has caused a sharp decline in US oil and gas stocks this week.
At the same time, Trump has shown no intention of following this approach, which is contrary to his approach of easing restrictions on the extraction and production of fossil fuels, which causes an oversupply and deepens the losses in crude prices. While the realization of either of the previous scenarios will serve the same result: more pressure on oil prices to decline.
Returning to the economic side, the Federal Reserve maintained concerns about keeping interest rates high for a long time after its meeting yesterday, in which it decided not to change the current range, and its Chairman Jerome Powell stressed in the speech following the announcement the cautious tone towards future cuts. This led to no change in the current expectations about the not achieving a rate cut before next June, according to the data shown by the CME FedWatch Tool.
Keeping interest rates high for a long time requires the continued flow of favorable data from the economy indicating the ability to adapt to tight monetary conditions, and the failure to achieve this may increase the obstacles to oil prices on the road to recovery.
