Impact Of Tariffs On Oil Demand
Higher tariffs are anticipated to significantly reduce world oil demand in 2025, according to S&P Global Commodity Insights. The projected demand growth has been revised to 635,000 barrels a day, a decline from the earlier estimate of 1.3 million b/d.
This adjustment is due to lower-than-expected consumption in regions such as the U.S., China, the Middle East, and Eurasia. The International Energy Agency has cautioned that growth areas like Brazil, India, and Singapore might face contraction if economic conditions worsen. India’s demand growth has reduced considerably, prompting a downward revision of the IEA’s 2025 forecast by 90,000 b/d.
Key trading companies have reflected the more subdued forecast. Glencore has reported an 88% decrease in year-on-year energy and steelmaking coal trade for the first half. Trafigura has also warned of further market slowdowns following preemptive purchases made ahead of tariffs.
S&P underscores the importance of stable tariff policies, with upcoming trade decisions involving Mexico, China, and Russia playing a pivotal role in shaping global oil demand.
Market Reactions And Strategies
We are seeing a clear signal of weakening oil demand for the rest of 2025. The sharp cut in demand growth forecasts, from 1.3 million to just 635,000 barrels a day, suggests downside risk for crude prices. This makes buying put options on WTI and Brent futures an increasingly popular strategy to protect against or profit from a further slide.
We’ve already seen this bearish sentiment reflected in the market since the tariff news broke in April 2025. West Texas Intermediate (WTI) has fallen from over $85 a barrel to trading near $72 this month. This sustained downward pressure supports strategies like selling call credit spreads, which can profit from prices staying below a certain level.
The softness is not just in crude itself, as the outlook for the entire energy sector appears dim. The Energy Select Sector SPDR Fund (XLE), a key benchmark for energy stocks, is down nearly 15% since the second quarter began. Derivative traders are looking at puts on this ETF or on major oil producers whose earnings will be hit by lower prices and demand.
We believe the upcoming tariff decisions on Mexico and China will inject significant volatility into the market. The CBOE Crude Oil Volatility Index (OVX) has remained elevated, suggesting traders are pricing in large price swings. This environment may be suitable for strategies that profit from volatility, but the clear downward bias on demand favors bearish positions.
The slowdown in emerging markets like India, where demand growth is now just a trickle, also presents opportunities in other asset classes. Currencies of major oil-exporting nations, such as the Canadian dollar, have shown weakness against the U.S. dollar. We see traders using currency futures and options to hedge or speculate on this trend continuing.
We cannot ignore the warnings from major physical traders like Glencore and Trafigura. An 88% drop in Glencore’s energy trade is a massive red flag that real-world consumption is cratering. This disconnect between physical markets and any lingering speculative optimism in financial markets creates a compelling case for bearish derivative plays.
