The price of oil plummeted by approximately 2% on Monday, reaching a two-week low, as news of surging interest in Chinese AI startup DeepSeek’s cost-effective AI model ignited concerns about energy demand for data centers. This decline was further exacerbated by pre-existing anxieties over weak Chinese economic data and potential negative impacts of proposed tariffs by former U.S. President Donald Trump on economic growth and energy consumption.
Brent crude futures experienced a significant drop of $1.42, or 1.8%, settling at $77.08 per barrel. Simultaneously, U.S. West Texas Intermediate (WTI) crude fell by $1.49, or 2.0%, to close at $73.17. These figures represent the lowest closing prices for Brent since January 9th and for WTI since January 2nd.
The rapid ascent of DeepSeek’s AI Assistant, surpassing ChatGPT to become the top-ranked free application on Apple’s U.S. App Store, introduced uncertainty among investors. Many had invested heavily in U.S. energy companies anticipating that the rise of AI would significantly boost energy demand to power the necessary data center infrastructure.
Investment bank Jefferies, in a recent report, highlighted the potential disruption. DeepSeek’s model is reportedly more energy and capital efficient, challenging the substantial electricity demand projections for the U.S. AI currently constitutes roughly 75% of overall U.S. demand forecasts through 2030-2035 in most projections. While it’s premature to definitively assess the long-term impact of DeepSeek, Jefferies suggests the year-to-date rally in power companies exceeding 20% might be vulnerable.
Further compounding concerns, recent manufacturing data from China, the world’s second-largest economy, fell short of expectations. This added to the growing apprehension surrounding global energy demand. Citibank analysts, in their report, emphasized that these weak indicators underscore the necessity for more robust policy interventions to bolster economic stability and growth.
Adding to the downward pressure on oil prices were comments made by former President Trump urging the Organization of the Petroleum Exporting Countries (OPEC) to lower oil prices to alleviate the economic pressures associated with the conflict in Ukraine. This call, according to Mizuho’s director of energy futures, Bob Yawger, further exacerbated the existing downward trend in oil prices. To date, OPEC and its allies, including Russia in the OPEC+ group, have not publicly responded to Trump’s remarks, instead referencing their existing plan to increase oil production starting in April.
Former President Trump’s tariff proposals also contributed to the negative sentiment surrounding oil prices. These threats fueled concerns that a potential trade war could significantly impede global economic growth and consequently, oil demand.
In conclusion, the convergence of DeepSeek’s disruptive AI model, weaker than anticipated economic data from China, and the lingering uncertainty surrounding former President Trump’s trade policies have collectively contributed to a significant decline in oil prices. While the long-term ramifications remain to be seen, these factors have introduced considerable volatility into the energy market. This underscores the complex interplay between technological advancements, geopolitical factors, and economic indicators in shaping the global energy landscape.
