In January, the United States reported that crude oil stock levels were higher than expected. The forecast predicted a drop of 0.7 million barrels, but the actual decline was only 0.25 million barrels.

Possible Demand Weakness

The smaller-than-expected decrease in crude inventory on January 23rd, 2025, points to potential demand weakness. This development raises doubts about recent market optimism and indicates that the supply-demand balance may be more relaxed than previously thought. We will need to look at the upcoming official EIA weekly report to confirm this bearish trend. This inventory data fits into broader economic worries. China’s manufacturing PMI for January 2025 was reported at 49.2, which indicates a contraction that could reduce their demand for oil. Furthermore, the Federal Reserve’s decision to maintain high interest rates in December 2024 aims to slow economic activity and might be affecting fuel consumption. These factors could pose challenges for crude oil prices. On the other hand, we must consider supply-side constraints. In late 2024, OPEC+ confirmed that it would extend its voluntary production cuts of 2.2 million barrels per day through the first quarter of 2025. This commitment to managing supply should help stabilize prices and prevent a significant drop. Additionally, any rise in geopolitical tensions could quickly change the current bearish outlook.

Trading Strategies for Crude Oil

In this mixed environment, traders might think about buying put options on the March 2025 WTI contract with strike prices around $70 or $72. This approach offers a defined way to profit from a potential price decline without taking on excessive risk. It protects against losses while limiting the maximum risk to the premium paid for the options. For a more cautious strategy, consider implementing bearish credit spreads by selling out-of-the-money call options. For instance, selling the March 2025 $85 call option and buying the $90 call option for protection creates a trade that benefits if crude oil prices stay below $85 per barrel. This approach utilizes time decay and is ideal for a market that remains stable or slightly declines. Create your live VT Markets account and start trading now.

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