Impact of Tariffs on Oil Demand

S&P Global Commodity Insights predicts that higher tariffs will greatly lower global oil demand in 2025. The expected growth has been cut down to 635,000 barrels per day, down from a previous estimate of 1.3 million b/d. This change is attributed to lower consumption in major regions like the U.S., China, the Middle East, and Eurasia. The International Energy Agency warns that countries like Brazil, India, and Singapore could also see reduced demand if their economic situations worsen. India’s demand growth has dropped significantly, leading to a 90,000 b/d downward revision in the IEA’s 2025 forecast. Major trading companies are adjusting to this muted outlook. Glencore has reported an 88% drop in year-on-year energy and steelmaking coal trade for the first half of the year. Trafigura also cautions of more market slowdowns after making early purchases ahead of tariffs. S&P emphasizes the need for stable tariff policies, as trade decisions involving Mexico, China, and Russia will significantly influence global oil demand.

Market Reactions and Strategies

There is a strong signal of weakening oil demand for the rest of 2025. The drastic cut in demand growth forecasts, from 1.3 million to just 635,000 barrels per day, indicates potential risks for crude prices. This encourages the use of put options on WTI and Brent futures as a strategy to guard against or profit from further price declines. Since the tariff news broke in April 2025, this negative sentiment has already been seen in the market. West Texas Intermediate (WTI) prices have dropped from over $85 a barrel to around $72. This ongoing downward trend supports strategies like selling call credit spreads, which can benefit from prices staying below a certain level. The downturn is not limited to crude oil; the entire energy sector outlook appears bleak. The Energy Select Sector SPDR Fund (XLE), a major benchmark for energy stocks, is down nearly 15% since the start of the second quarter. Derivative traders are eyeing put options on this ETF or on large oil producers whose profits will suffer from falling prices and demand. We anticipate significant volatility in the market due to impending tariff decisions regarding Mexico and China. The CBOE Crude Oil Volatility Index (OVX) remains high, indicating that traders anticipate substantial price fluctuations. While this environment can be beneficial for strategies that profit from volatility, the overall bearish demand trend favors short positions. The slowdown in emerging markets like India, where demand growth is minimal, also opens up opportunities in other asset classes. Currencies from major oil-exporting countries, like the Canadian dollar, are weakening against the U.S. dollar. Traders are utilizing currency futures and options to hedge or bet on this trend continuing. We must heed the warnings from major traders like Glencore and Trafigura. Glencore’s 88% plunge in energy trade signals a severe decline in actual consumption. This gap between physical markets and any lingering speculative optimism in financial markets strengthens the case for bearish derivative strategies. Create your live VT Markets account and start trading now.

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