Who would want to be an oil analyst, having to forecast where prices are likely to be in a month or even 12 months’ time?

In the last five years alone, Brent crude futures have collapsed to below $20 per barrel – and infamously actually went negative at one point during mid-2020 – before soaring to more than $130 per barrel following the Russian invasion of Ukraine.

Since their 2022 peak, however, they have been on a steady downward path, with very little in the way of volatility despite rising geopolitical uncertainty and increasing tensions in the Middle East, a key oil-producing region, and the long, drawn-out conflict in Ukraine.

Today, Brent crude trades around half the level it reached in 2022, and it’s anyone guess where the current downtrend will end.

Therefore, we thought it worth asking what would $60 or possibly $50 oil mean for stock markets and the world economy?

COULD PRICES KEEP FALLING?

Volatility has always been a characteristic of oil markets, yet one of the most striking features of the oil market over the past three years has been precisely the lack of volatility despite rising geopolitical tensions.

When Hamas attacked Israel in October 2023, markets braced for a spike in the oil price which never happened.

When Israel and Iran came to the brink of conflict this June, with each side firing salvoes at the other’s energy infrastructure, there was a brief spike in oil prices, but it was over in a matter of days and the downtrend quickly resumed.

Javier Blas, senior energy correspondent at Bloomberg, pondered at the time whether the oil market was ‘pushing its luck’.

‘The biggest risk is sleepwalking into believing that just because two years of violence hasn’t disrupted flows, the physical market would never be disrupted. Particularly in the Middle East, it’s always the last straw that breaks the camel’s back,’ wrote Blas.

The reason oil prices can’t go up is because there is too much of the stuff – put simply, everyone is over-producing.

The US, now the world’s largest producer of crude, is pumping a near-record 13.3 million barrels per day, while Saudi Arabia, which had held output back for years in an attempt to support prices, has now ramped up production as it races to reclaim market share.

On 3 August, OPEC+, which includes Saudi Arabia, agreed to accelerate its scheduled production increase meaning the 2.2 million barrels per day of cuts announced in November 2023 which were due to unwind by September 2026 will now be unwound by this month.

In its Short-Term Energy Outlook published on 12 August, the US EIA (Energy Information Administration) forecast global liquid fuel production would rise by two million barrels per day on average in the second half of this year with OPEC+ contributing half the increase and non-OPEC producers such as the US, Brazil, Norway, Canada and Guyana providing the other half.

At the same time, demand is forecast to rise by only 1.6 million barrels per day meaning every day 0.5 million barrels will be added to inventories.

On top of the 1.4 million barrel per day build-up in the first half, that means inventories will increase by 1.9 million barrels per day in the second half of 2025 and 2.3 million barrels per day in the first half of 2026.

This will inevitably put ‘significant downward pressure’ on oil prices, says the EIA, which is forecasting an average Brent crude price of $58 per barrel in the fourth quarter of 2025 and $49 in March and April next year.

As inventories build, the cost of storing oil will rise, which means crude prices will have to fall to reflect the higher marginal cost of storage, predicts the EIA.

Assuming prices do dip below $50 next year, and there are no major disruptions, both OPEC+ and non-OPEC countries – including the US – will eventually be forced to reduce supply, to the point where inventory build slows and a small increase in demand could lift prices back to an average of $54 in the end of 2026.

This bearish view on supply, demand and prices is backed up by the International Energy Agency, which has revised up its production forecast for this year and next year and has repeatedly downgraded its demand growth forecasts.

In its mid-August Oil Market Report [end], the IEA corroborates the EIA’s view that most of the increase in output over the next two years is likely to come from non-OPEC+ countries, in particular the US and Canada, while consumption has been weaker than expected with demand forecasts for Brazil, China, Egypt and India all revised down from the previous month.

‘While oil market balances look ever more bloated as forecast supply far eclipses demand towards year-end and in 2026, additional sanctions on Russia and Iran may curb supplies from the world’s third and fifth largest producers,’ says the report, more in hope than in expectation.

WHO BENEFITS FROM CHEAPER OIL?

While President Trump has repeatedly moved the goalposts when it comes to global trade, raising tariffs one month only to reduce them weeks or months later, he has at least been consistent about wanting lower oil prices, and in the EIA’s scenario he will get what he wants.

Lower oil prices are unquestionably good for US consumers and businesses as they reduce inflation expectations and provide leeway to increase spending on other items through higher income.

According to the American Automobile Association, retail gasoline prices could drop from their current average of around $3.70 per gallon to below $3 per gallon next year which would be the lowest price since the pandemic.

Psychologically, gasoline prices have a huge impact on US consumers’ willingness to spend, and with tariff-induced inflation now starting to come through in food and services, keeping energy prices down would be convenient both politically and economically.

Low energy prices could help keep core inflation (food and energy) down, disguising to some extent the nascent impact of tariffs, and allow the White House to continue pressuring the Federal Reserve to lower interest rates, which would be another spur to consumption.

According to Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable Asset Management, a 10% rise in oil prices typically lifts headline inflation in both advanced and emerging economies by about 0.4% after a few months, although the effect is larger for net importers, so if we assume a 10% fall could knock 0.4% off inflation we probably wouldn’t be too wide of the mark.

As the US is a net exporter of oil, and oil is priced in dollars, it’s also not unreasonable to assume a weak oil price would feeds through into a weak dollar, which is positive for other US exporters but raises the price of imports.

For emerging markets, where energy has a relatively high weighting in consumer price indices compared with developed markets, lower crude prices not only give central banks more wiggle room to lower interest rates, should they need to, they also save governments having to use subsidies to smooth input costs.

Countries like India, South Korea, Thailand, Taiwan and Vietnam are heavily dependent on imported oil and therefore likely to benefit, whereas Brazil, as a net exporter, would lose out from lower oil prices. Although India faces, for now, the challenge of 50% tariff on exports to the US as a punishment for buying Russian oil.

For companies, lower oil prices obviously reduce input costs, but the effect may be less pronounced than in the past because in general businesses are becoming more energy-efficient than they used to be.

The biggest winners would be energy-intensive industries like those making steel, chemicals, cement, cars, trucks and large industrial equipment, while those using oil by products as feedstocks, such as industrial gas companies, would also benefit. Travel stocks could also get a boost as the cost of fuel goes down.

IS IT BAD FOR ENERGY STOCKS?

On the face of it, a lower oil price wouldn’t be great news for companies like BP (BP.) and Shell (SHEL), but ironically it could be good news for shareholders, especially if they are looking for income.

A new report by BloombergNEF suggests with long-term commodity prices determined by the cost of producing the marginal unit to satisfy demand, higher-cost greenfield E&P (exploration and production) sites will require a long-term real oil price of $63 per barrel to generate a ‘reasonable’ return.

At that price, the oil industry can bring online many major new resources like deepwater projects in the Gulf of Mexico, off the coast of Angola and Nigeria, in the icy hinterland of Alaska and in land-locked countries in East Africa, as well as higher-cost US shale.

A higher oil price is also necessary to stop depletion – US firm Exxon Mobil (XOM:NYSE) estimates existing oilfields decline at an average rate of 4% per year after investment, but that figure would be as much as 15% if the company didn’t maintain a high level of ongoing investment.

As we said, forecasting oil prices is tricky, especially with the state of geopolitics today, but if companies need Brent crude to be $63 per barrel to make it worthwhile continuing to ‘drill, baby drill’, yet prices drop to $50-something because there is still plentiful supply – which BloombergNEF, the EIA and the IEA are all forecasting – then shareholders could be in line for higher returns in the form of increased dividends or more share buybacks as companies redeploy their cash flow.

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