Fitch Ratings has downgraded its forecast for the global oil and gas sector for 2025. They point to higher production from OPEC+, an increase in non-OPEC+ supply, and U.S. tariffs as the main reasons. The agency now expects oil demand to grow by just 800,000 barrels per day, a drop from the previous forecast of over 1 million. Fitch has also adjusted its oil price estimate downwards, from $70 to $65 a barrel. Even with some relief from tariffs, uncertainty continues to dampen demand. Geopolitical tensions could support prices, but the ongoing oversupply in the market is a major issue.

Market Reaction to Revised Outlook

Most energy companies are financially stable with strong balance sheets and disciplined spending, benefiting from the high prices seen in previous years. Fitch Ratings’ decision to lower its outlook mainly shows that global supply might now exceed demand, which often makes markets cautious. OPEC+ is increasing production, and other oil producers are also pumping more oil, contributing to a heavier supply situation. Meanwhile, demand is now projected to grow by over 200,000 barrels per day less than before. While this cut may seem small, it still impacts market sentiment. The agency’s reduction of the Brent crude forecast by $5 suggests weaker support for prices. This isn’t random; tariffs and uncertainty about consumer habits are affecting short- to mid-term demand. Although some diplomatic efforts have eased trade tensions, clarity is still lacking, which markets typically dislike. In the past, political instability in key oil-producing areas has helped prevent prices from dropping too much. However, as producers keep adding supply despite these tensions, that historical pattern is breaking down. Currently, market fundamentals seem to have a stronger influence than geopolitical issues. We’re seeing a shift from a market driven by risk premiums to one more focused on supply and storage levels.

Positioning for Traders

Many companies in the oil sector remain financially strong due to high prices from 2021 to early 2023. They have used that time to lower their debt and adopt cautious investment strategies, making them more resilient against earnings volatility. Even as prices decline, their survival is not broadly at risk. However, to maintain investor confidence, they may reduce project spending or delay entering more expensive areas. For those trading in crude-related derivatives like futures or options, the changing outlook is crucial. The drop in forecast demand, along with increased supply, may result in narrower trading ranges and potentially more variability within a day. Volatility may not be as extreme day-to-day, but prices could swing more in response to inventory data or weekly rig counts. This situation favors shorter-term trading positions. Duration risk could be challenging to handle with fast-moving macroeconomic changes—events like tariff updates, unexpected inventory reports, or OPEC+ decisions can cause contracts to fluctuate even when overall prices are stable. This is an unusual scenario, but reminiscent of previous periods of price compression. Timing is becoming more important than having strong opinions about price direction. With sentiment slightly bearish but sensitive to sudden shifts, committing too heavily to a particular direction can create unnecessary stress. Strategies that are dollar-neutral may work better in this environment, focusing on structure rather than outright price movements. Keeping an eye on daily reports—like EIA numbers, internal OPEC reports, and rig counts—will provide early insights into changing sentiment beyond just price movements. Traders need to stay adaptable and position themselves accordingly. Current conditions suggest we are facing compression, not collapse, which provides important information in the world of derivatives. Create your live VT Markets account and start trading now.

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