Oil price fall: what's behind the four-year low in crude markets?

Recent oil price movements and key triggers

Oil prices have experienced a significant decline over the past month, with Brent crude oil dropping to approximately $60.00 per barrel, a four-year low. This downturn is attributed to a combination of factors, including increased supply, weakening demand, and strategic decisions by major oil producers such as Saudi Arabia.

The decline represents a stark contrast to the market's performance earlier this year when prices were hovering closer to the $75.00 mark. This dramatic shift has caught many traders off-guard, particularly those who had positioned themselves for potential supply disruptions due to ongoing conflicts in the Middle East.

The speed of the decline has been particularly noteworthy, with Brent crude shedding more than 20% in just over four weeks. This rapid deterioration has triggered technical selling, compounding the downward pressure on prices.

Market volatility has increased significantly, with daily price swings of 2-3% becoming common. This environment has created both challenges and opportunities for oil traders, depending on their positioning and risk management strategies.

OPEC+ dynamics and Saudi Arabia's strategic shift

Saudi Arabia, traditionally a proponent of production cuts to stabilise prices, has shifted its stance. Frustrated by OPEC+ members like Kazakhstan and Iraq exceeding production quotas, Riyadh has signalled a willingness to tolerate lower oil prices and has even pushed for an unexpected output hike in May. This move has contributed to the oversupply in the market, exerting downward pressure on prices.

Saudi Arabian officials have been informing allies and industry experts that the kingdom is no longer willing to support the oil market through additional supply cuts and is prepared to endure a prolonged period of low prices, according to five sources familiar with the discussions. This potential policy shift suggests that Saudi Arabia may increase production to expand its market share, marking a significant change after five years of leading the OPEC+ group in deep output cuts to balance the market.

This strategic pivot indicates a departure from Saudi Arabia's previous approach of defending high oil prices. By signalling a tolerance for lower prices, the kingdom appears to be prioritising market share expansion over price stabilisation. This move could have far-reaching implications for global oil markets, potentially leading to increased competition among producers and influencing future OPEC+ policy decisions.

The timing of this shift is particularly notable as it coincides with increasing production from non-OPEC sources, including record-high output from the United States and growing production from Guyana and Brazil.

Global economic concerns weighing on demand

Economic indicators suggest a slowdown in global demand for oil. The US economy contracted by 0.3% in the first quarter of 2025, raising fears of a potential recession. This contraction was driven primarily by a surge in imports ahead of newly implemented tariffs, which also contributed to a record-high trade deficit. Additionally, concerns about China's economic growth have further dampened demand expectations.

China's economic performance has been particularly disappointing, with industrial production growing at its slowest pace in six months and property sector woes continuing to drag on overall economic activity. As the world's largest oil importer, any slowdown in Chinese demand has outsized effects on global oil markets.

European economies aren't faring much better, with the eurozone struggling to gain momentum after narrowly avoiding recession last year. High interest rates continue to weigh on business activity, while consumer spending remains subdued despite moderating inflation.

These demand concerns have coincided with the seasonal transition from winter to spring, a period when refinery maintenance typically reduces crude oil demand. This seasonal factor has exacerbated the downward pressure on prices at a time when the market was already vulnerable.

Saudi Arabia's financial resilience and strategic calculations

Saudi officials have indicated that the kingdom can sustain a prolonged period of low oil prices. This strategy may be aimed at regaining market share from non-OPEC producers like the US and Guyana or disciplining non-compliant OPEC+ members. The kingdom is prepared to weather the downturn through increased borrowing and spending cuts, potentially delaying major projects.

The kingdom's finances are in a stronger position than during previous oil price downturns, with substantial foreign reserves of approximately $415 billion. This financial buffer provides Saudi Arabia with the flexibility to withstand lower oil revenues for an extended period.

Crown Prince Mohammed bin Salman's ambitious Vision 2030 programme, which aims to diversify the Saudi economy away from oil dependence, may face challenges if oil prices remain depressed. However, Saudi officials have indicated that core components of the programme will proceed regardless of oil price fluctuations.

The strategic calculations behind Saudi Arabia's apparent willingness to accept lower prices likely also include geopolitical considerations, particularly regarding its relationship with Russia within the OPEC+ framework and its complex ties with the United States.

Market structure and futures trading dynamics

The oil market is experiencing unusual dynamics, characterised by a peculiar futures curve known as "contango," where future prices are higher than current prices. This typically signals bearish sentiment and encourages stockpiling. Despite recent bearish indicators - including increased oil production by OPEC+ and trade tensions between the US and China impacting demand - the futures curve's complex shape suggests a more nuanced outlook.

This contango structure creates incentives for traders to buy and store physical oil, potentially leading to increased inventories. Reports already indicate that floating storage - oil stored on tankers - has begun to increase as traders take advantage of the price differential between current and future months.

The commodity options market is also signalling increased bearish sentiment, with put options (which profit from price declines) seeing increased demand. The put-call skew has shifted notably toward puts in recent weeks, indicating that traders are paying a premium for downside protection.

Speculative positioning in the futures market has turned increasingly bearish, with hedge funds and other money managers reducing their net long positions to the lowest level in more than a year. This positioning could exacerbate price movements in either direction, depending on how market fundamentals evolve.

Implications for major economies and oil companies

The drop in oil prices presents a mixed picture for major economies. For oil-importing nations, lower prices act as a tax cut for consumers and businesses, potentially stimulating economic activity. However, for oil-exporting countries, the revenue shortfall can strain government budgets and economic stability.

The United States, as both a major producer and consumer of oil, faces complex implications. Lower prices benefit consumers through reduced fuel costs but put pressure on the domestic shale industry, which generally requires higher oil prices to remain profitable. Any significant curtailment of US production could eventually help rebalance the market.

Major oil companies are likely to reassess their capital expenditure plans if prices remain depressed. We've already seen announcements from several companies indicating they will prioritise cost control and focus on the most profitable projects in their portfolios.

Renewable energy initiatives might face headwinds as lower oil prices reduce the economic incentive to transition away from fossil fuels. However, most governments and major corporations have made long-term commitments to decarbonisation that transcend short-term oil price fluctuations.

Technical analysis of the oil price

WTI light crude oil is trading in four-year lows, having fallen through its 2021-to-2025 $65.25-to-$61.76 key support zone in April. 

The June-to-October 2019 lows at $51.03-to-$50.63 represent possible downside targets, together with the psychological $50.00 mark and the 61.8% Fibonacci retracement of the 2020-to-2022 bull market at $49.52.

WTI crude oil monthly chart

Because of inverse polarity the previous $65.25-to-$61.76 major support zone should now act as a resistance area.

The Brent crude oil price, down over 25% from its early January high at $81.73 per barrel, and down 20% in the past month alone, continues to slide and is fast approaching its April low at $58.17. Failure there may well lead to the $55.00-to-$53.00 region being hit. 

Brent crude oil daily chart

Strong resistance sits between the September 2024 and March 2025 lows and the late April high at $67.39-to-$68.46. While this resistance area caps, the downtrend remains entrenched.

How to trade falling oil prices

For traders and investors, the current oil market presents both risks and opportunities across various time horizons. Here's how you can navigate this volatile environment:

1. Research the oil market thoroughly, including supply-demand dynamics, technical indicators, and geopolitical factors that could impact prices.
2. Choose whether you want to trade or invest based on your outlook for oil prices and your preferred time horizon.
3. Open an account with IG by visiting our website and completing the application process.
4. Search for oil markets like 'Brent Crude' or 'WTI' on our trading platform or app.
5. Place your trade, ensuring you have appropriate risk management measures in place, especially important in the current volatile environment.

Spread betting and CFD trading offer ways to potentially profit from both rising and falling oil prices, allowing flexible positioning as market conditions evolve. These products enable traders to take advantage of oil's volatility without needing to take physical delivery.

For those with a longer-term outlook, ETFs tracking oil prices or energy sector equities provide exposure to the broader energy market trends. The diversification offered by these instruments can help mitigate some of the risks associated with individual oil company stocks.

The current decline in oil prices reflects a complex interplay of supply-side decisions, demand-side concerns, and strategic manoeuvres by key players like Saudi Arabia. While the short-term outlook remains bearish, market dynamics could shift rapidly in response to geopolitical developments, economic indicators, and policy decisions by major oil-producing nations.