Oil prices look set to end the year lower as demand weakness, particularly from China, prevails — but 2025 may bring an even steeper loss, with the possibility of a drop below $50 a barrel if the market sees a “perfect storm” of factors, including sharp economic declines in China and Europe.
“There’s much more risk of a price collapse next year than a price spike for crude,” said Tom Kloza, global head of energy analysis at OPIS, a subsidiary of MarketWatch publisher Dow Jones. Proposed U.S. tariffs “might elevate crude-oil benchmarks short term but lead to lower prices as companies become used to the impact, with Canada and Mexico perhaps forced to be more aggressive to move their exports.”
He added that universal tariffs might impede GDP growth in the U.S. and abroad, while there could be considerably more U.S. oil output, as well as reasonable growth in shale production in both the U.S. and Canada.
Unused production capacity among the members of the Organization of the Petroleum Exporting Countries, meanwhile, can be viewed as a “coiled spring that will, eventually, spring,” said Kloza. A supply surplus is “almost a certainty,” he noted, though it will be “lumpy, and the most at-risk time is September through December.”
Oil prices were trading lower year to date as of Wednesday, with prices for U.S. benchmark West Texas Intermediate crude settling at $70.58 a barrel on the New York Mercantile Exchange, down 1.5% from the end of last year.
For prices, a collapse in oil would mean a drop below $50 a barrel — and the driver of that would have to be a “dramatic drop in demand globally,” said Brian Mulberry, client portfolio manager at Zacks Investment Management. Front-month WTI and Brent crude futures haven’t traded below $50 since 2021, FactSet data show.
And when it comes to oil demand, China — the world’s second-largest consumer — seems to have mattered the most, with its economic data releases and stimulus plans feeding volatility in prices for crude this year.
For now, appetite for economic stimulus from the Chinese government has been strong, and its economy is likely to avoid a big contraction. Still, the risk of a collapse in oil prices “needs to be acknowledged in the case that [China’s] economy softens more, or faster, than expected,” said Mulberry.
In its monthly report released in December, OPEC lowered its global oil demand-growth outlook for this year and next, as it also reduced its demand-growth forecast for China.
‘Wrecking demand immediately would send oil well below that $50 support level that is meaningful to profitability for refiners and exploration efforts.’ — Brian Mulberry, Zacks Investment Management. “The perfect storm on the downside [for oil] is a sudden and sharp decline in both the Chinese and European economies,” said Mulberry. “Wrecking demand immediately would send oil well below that $50 support level that is meaningful to profitability for refiners and exploration efforts.”
Overall, it’s “easier to envision risks to the downside,” said Pavel Molchanov, analyst at Raymond James.
It is “purely a question of when” OPEC will unwind its long-running production cuts, he said. “As disciplined as OPEC has been, this strategy cannot be sustained forever because, eventually, the members need to think about protecting their market share.”
OPEC and its allies, together known as OPEC+, agreed to extend voluntary output cuts of 2.2 million barrels per day to the end of March 2025. Production was previously set to gradually increase at the end of December.
Unwinding these cuts may push oil prices back to the low end of the trading range they’ve seen over the past two years, which would be at around $60 for WTI, said Molchanov. Front-month WTI futures have traded between a high of nearly $80 to a low of about $63 over the past two years.
Oil prices have not been in triple-digit price levels since mid-2022 — during the initial crisis period of Russia’s war on Ukraine — so barring some other dramatic geopolitical event, “it is hard to imagine prices getting back to those levels,” said Molchanov.
Marcus McGregor, managing director of corporate research at institutional asset-management firm Conning, also sees a “greater risk of a price collapse than of prices reaching $100 per barrel, given current production levels, inventory levels and spare production capacity.” That’s barring any significant geopolitical event such as a major conflict, he said.
Despite that risk, McGregor still expects oil prices to remain within Conning’s current forecast range of $60 to $90 a barrel into 2025 for U.S. benchmark WTI crude.
Supply surplus
In its most recent monthly report, the International Energy Agency forecast global oil supply of 104.8 million barrels per day and global demand of 103.9 million bpd in 2025, implying a supply surplus of roughly 900,000 bpd.
Whether the IEA’s forecast comes true will ultimately depend on global demand, said Zacks Investment’s Mulberry. “If there are material declines in the Chinese or European economies, that would be the biggest additive to supplies.”
Meanwhile, incoming U.S. President Donald Trump’s pledge to raise domestic production has contributed to worries about a supply surplus, particularly given that current U.S. output of around 13.6 million barrels per day is a record high.
U.S. production should grow next year by around 200,000 to 300,000 bpd despite record oil output, said Matthew Polyak, managing partner at Hummingbird Capital. However, boosting oil production by 3 million bpd seems “unlikely unless there is a large financial incentive for companies to grow,” he said.
Trump’s pick for Treasury secretary, Scott Bessent, has advised Trump to pursue a “3-3-3” policy: cut the budget deficit to 3% of gross domestic product by 2028, spur GDP growth of 3% and produce an additional 3 million barrels of oil per day.
There’s a “mismatch” between the incoming administration’s “‘drill, baby, drill’ rhetoric” and the industry’s discipline, according to Molchanov. Raymond James monitors capital expenditures for the world’s top 50 oil and gas companies, he noted; of those, 20 have already disclosed capital budgets for 2025 and, of those 20, 13 budgets are down, six are up and one is flat.
“This speaks to the continuation of strong discipline in the industry,” said Molchanov. “There is essentially nothing the U.S. government can do that would meaningfully boost drilling activity from current levels.”
‘Intriguing’ developments
The most “intriguing developments” in 2025, however, will “revolve around Trump’s proposed economic and tariff policies, as well as his approach to managing geopolitical conflicts in Europe,” said McGregor. These are factors which could “significantly influence global trade news, energy demand and market sentiment.”
Any “unanticipated” changes in China’s growth trajectory could swing oil demand dramatically, while conflict escalations in the Middle East, Africa or Eastern Europe could “disrupt supply chains or create risk premiums,” he said. Domestically, U.S. policies promoting increased fossil-fuel production could add to global supply and weigh on prices, while U.S. sanctions or trade restrictions could tighten supply, McGregor added.
