2025 has seen the crude oil market as a crucible of volatility, shaped by a cascade of global events that demand the attention of professional traders and hedgers. From US-China tariff wars to OPEC+ production hikes and geopolitical tensions, these forces reshape futures pricing (backwardation to contango), increase volatility, and may force strategic hedging recalibrations. Understanding these dynamics is critical to seizing opportunities and risk management for those trading West Texas Intermediate (WTI) or Brent contracts or hedging exposure. This article highlights how current events drive the market, their impact on volatility, and actionable strategies for navigating the chaos.
Source: Barchart
Due to the recent global economic turbulence, the June 2025 WTI crude oil futures contract has broken out of a 3-year trading range.
Tariff Wars and Demand Erosion
The US tariff salvo imposed significant duties on all imports, with steeper rates for select nations, triggering China's retaliatory tariffs on US goods. It's useless to print the percentage of new tariffs simply because of the dynamic nature we are currently experiencing. These measures, aimed at bolstering domestic industries, have sent shockwaves through global trade, eroding economic growth forecasts and, by extension, oil demand. The US Energy Information Administration (EIA) slashed its Brent crude forecast to $68 per barrel for 2025 and $61 for 2026, reflecting a global demand growth cut to 0.9 million barrels per day (b/d) in 2025. This bearish signal depresses front-month futures for traders while creating a contango forward curve in oil prices.
The demand hit is subtle but pervasive: tariffs curb industrial output and consumer spending, reducing fuel consumption. Hedgers, particularly refiners or airlines, face narrower crack spreads and higher fuel cost risks, prompting a rethink of futures purchases. Traders can exploit this by shorting near-term futures contracts (bear spreads)—I.E., selling December 2025, buying February 2026—to capture the demand-driven slide. Volatility spikes are inevitable as markets react to tariff news, with implied volatility in options on July 2025 Brent futures rising. Monitoring trade negotiation headlines is key, as any de-escalation could spark sharp reversals, tightening spreads, and lifting prices.
OPEC+ Production Hikes and Supply Glut
OPEC+'s decision to accelerate production, releasing 411,000 b/d in May—triple the planned 135,000 b/d—has jolted the supply side. This move, announced on April 3, aims to secure market share but risks flooding inventories from Q2 2025 as the EIA projects global stock builds. The result is a pronounced contango in the futures forward curve, beginning with December 2025 WTI at $59 versus $61 for December 2028, signaling oversupply. Crude oil has been in backwardation (near months more expensive than deferred) for an extended period, making producer hedging difficult at best. The crude oil market will become more efficient as it swings back into a contango curve (near months lower priced than the deferred).
For hedgers, the implications are stark. Producers may rush to sell December 2025 futures to lock in prices above $60, guarding against further declines. Refiners, anticipating cheaper crude, might delay locking in purchases. Volatility is amplified by the surprise scale of OPEC+'s hike. CNBC noted that markets were "stunned," elevating risks of sharp price drops or brief squeezes if demand surprises. Traders can lean on volatility products, like VIX-correlated oil ETFs, to hedge or speculate. At the same time, hedgers should brace for higher margin requirements in deferred contracts as price swings widen bid-ask spreads, increasing risk for the exchanges and hedgers.
Geopolitical Wildcards: Sanctions and China
Sanctions on Russia, Iran, and Venezuela inject supply-side uncertainty, countering OPEC+'s glut. These measures, restricting output from key producers, could tighten supply unexpectedly, particularly if enforcement ramps up. This creates a two-sided market for traders: bearish bets on oversupply risk being upended by sudden disruptions, making near-term contracts like June 2025 WTI ($60-$62 range) volatile.
As the world's top oil importer, China's economic performance adds another layer. Tariff-induced slowdowns have slashed its crude imports, with reports indicating a potential halt in US oil purchases. The EIA flags this as a significant demand risk, with China's growth hiccups rippling globally. Futures traders should watch technicals—a break below $54.67 for the June WTI contract support level signals deeper declines, while hedgers monitor China's economic data for demand clues. Volatility spikes here are structural: any policy shift, like China easing tariffs, could flip futures curves into backwardation, squeezing shorts and rewarding nimble longs.
Seasonal Weakness
Source: Barchart
Since early spring, the June WTI crude oil market prices have consistently traded lower than their 5-year average of the previous June contracts.
Source: Moore Research Center, Inc. (MRCI)
The failed December to May seasonal rally was another sign of weakness in the June crude oil contract. MRCI research has revealed that for the past 30 years, crude oil has experienced a significant seasonal low in December, and prices rallied into early May. The pattern results from refiners needing to acquire crude oil to meet the demand for gasoline in the upcoming summer driving season, which begins near the end of May. Crude oil usually sees a significant selloff when this pattern fails, as it did this year.
Source: Barchart
Markets to Participate in Crude Oil Trades
Futures market traders could trade the standard-size (CL) crude oil contract, the mini-crude oil contract (QM), or the micro-contract (CY). Equity traders may be interested in trading the exchange-traded fund (USO). Bearish oil prices, sometimes seen as a contracting economy, could negatively impact the stock market and result in a bearish price move. Traders could trade the mini S&P 500 (ES) or the micro-contract (ET) to participate.
In closing..
The crude oil market is gripped by volatility, driven by US-China tariff escalations, OPEC+ production increases, and geopolitical uncertainties, reshaping futures dynamics for speculators and hedgers. The EIA's downgraded Brent outlook for 2025 and 2026 reflects a global demand growth cut to 0.9 million b/d, signaling weaker fundamentals and shifting December 2025 and forward WTI futures into a deeper contango structure. OPEC+'s surprise 411,000 b/d output hike starting May, announced in early April, risks swelling inventories from Q2, while sanctions on Russia, Iran, and Venezuela, alongside China's tariff-driven economic slowdown, create supply-demand volatility. Traders could consider bear spreads—selling near-term, buying longer-dated contracts—to capture demand weakness or use straddles on mid-2025 Brent options to play volatility, monitoring key WTI support levels for momentum shifts. Hedgers, particularly producers, may consider selling mid-2025 futures to secure cash flows, while refiners might delay locking in purchases, using options to hedge against potential supply disruptions.
With seasonal patterns faltering—June WTI lags its 5-year average, and the typical December-to-May rally fails, hinting at further weakness. Traders can exploit contango through calendar spreads or volatility-focused ETFs, tracking China's economy and the Commitment of Traders data for sentiment cues; a tariff resolution could pivot curves toward backwardation, favoring longs. Hedgers face wider spreads and margin pressures, pushing producers to secure Q3 2025 swaps and consumers to stagger futures buys with protective calls. Markets like CL, QM, and CY for crude, ES, and the ET for broader equity market exposure—traders and hedgers must blend technical analysis, trade policy updates, and China's economic signals to navigate this turbulent yet opportunity-laden market.
