Softening Crude Markets May Aid India Tackle Trump's Tariff Attack  

Most investment banks expect oil prices to remain at US$ 65-66 per barrel till the end of 2025. This may come to India's aid, amid growing tariff tensions with the US. The softening oil market is expected to help India offset a substantial shock from Trump's tariff measures. 

What's Behind The Bearish Oil Market?

These bearish trends are due to a combination of factors, which include slowing demand from the world’s biggest oil consumer, China. Of equal importance, however, has been the role played by the oil cartel — the Organisation of Petroleum Exporting Countries (OPEC) — along with its allies, led by Russia.

On the demand side, the slowing consumption in China has been a concern for oil producers in recent years. It had initially stagnated during the pandemic due to the disruption of industrial activity.

There was a pick-up subsequently, but demand did not expand as much as expected, owing to the muted pace of GDP growth. The Asian economy’s previous high growth path was replaced by a much lower rate of 5.5 per cent from 2023 onwards. 

There has also been a fundamental shift in China’s energy mix, which has contributed significantly to the subdued demand for fossil fuels. This includes the rapid expansion in the use of electric vehicles, the development of a high-speed rail network, and a slump in the construction sector.

The result was a 1.2 per cent fall in the country's total crude oil consumption in 2024, which was considered an unprecedented situation by the International Energy Agency (IEA). Imports are set to rise in 2025, however, with consumption projected to go up by a marginal 1.1 per cent.

Yet, lowered demand from China is not the only reason for the oversupply in global oil markets. Another major factor is the shift in strategy by OPEC Plus. By keeping a focus on price stability, the cartel is now aiming to retain market share. It is thus gradually unwinding curbs of 2.2 million barrels per day (bpd) on output, which had been laid down over the past two years.

Earlier this month, OPEC Plus announced it will raise oil output by 5,47,000 bpd from September. This will be in addition to a separate increase in output by the UAE, amounting to about 2.5 million bpd. 

The latest hike in output comes after successive increases from April to July. The increased availability in the market has been a major driver for the sustained softening of oil prices. This is a reversal of past efforts to support oil prices by curtailing production. 

The change in strategy has been prompted partially by the fact that several members have been regularly violating quota limits.  This includes the UAE and Kazakhstan, which have been concerned over the non-utilisation of large production capacities. Now these members will be able to raise output, but will have to do so in a softening market. 

The emergence of new oil finds in countries like Brazil, Somalia, Suriname, and Namibia is also bound to have weighed in on the OPEC Plus decision. It is a truism that high oil prices are an incentive for intensive exploration and development. The current bearish trends, in contrast, are not likely to be helpful for newer producers and could conceivably constrain efforts to raise output rapidly.

US Shale Producers Struggle 

As for US shale oil producers, lower oil prices are a concern, given the higher production costs in these fields. In fact, the American energy industry has been less than enthusiastic about Donald Trump’s push to bring down prices.

Such moves will increasingly depress the profitability of shale oil producers. In the past, OPEC has used the strategy of pushing down prices to create difficulties for the shale oil producers, so this seems to be a déjà vu moment.

The present strategy of enhancing market share is also pragmatic at a time when renewable energy is on the ascendant. Making fossil fuels cheaper reduces the cost advantage of other new energy segments. It has to be seen for how long OPEC Plus can sustain this policy, but it is clear the market will continue to be in a softened mode in the short term, unless worsening geopolitical tensions lead to a spike in prices. 

India’s Leverage Set To Increase

As for India, the current trends have come as a bonanza. With rising economic growth, its oil demand is rising much more rapidly than in China. As the world’s second-biggest oil importer, it is expected to have even greater leverage in oil markets. The oil import bill was estimated at US$ 143 billion in 2024-25. This may decline slightly in the current financial year, owing to lower international prices, which will come as a relief to the Finance Ministry. 

In this backdrop of depressed prices, it would actually not have been much of a hardship for India to reduce oil purchases from Russia and shift to other suppliers. However, the patently unreasonable and public tirade launched by Donald Trump and his aides on this score has made it untenable to make concessions on this issue. It is thus now being reported that, after a brief pause, Indian refineries are back to purchasing Russian oil at higher discounts than earlier. 

Judging by White House comments after the Trump-Putin meeting, it is evident that this is being used as a pressure tactic to bring Russia to the negotiating table. So far, it does not seem to have worked very well, as there has been little progress beyond the initial bilateral summit.

For India, like any other country, the best tactic is to work in its national interest. Right now, this means that to ensure energy security, it must retain the existing freedom to buy from whichever supplier offers the most attractive terms.