The January oil price rally gave way to a sell-off in February as the market started pricing in the trade war risks that could dampen economic and oil demand growth in the world’s biggest economies.
Oil prices jumped in January after the Biden Administration slapped its farewell sanctions on Russia’s oil trade networks – the most aggressive yet.
As Russia’s top oil customers, China and India, found themselves scrambling for non-sanctioned vessels, traders, and insurers to ship their Russian crude, market participants started pricing in a serious disruption of the cheap oil supply to the world’s biggest and third-biggest crude importers.
Oil surged in January and money managers piled into crude futures and options in one of the most bullish drives on the market in recent months.
Hedge funds and other portfolio managers were also encouraged to take bullish bets on crude oil because of the continuous decline in commercial crude and oil product inventories in the developed economies of the OECD.
But the tariffs and tariff threats of the new U.S. Administration as President Donald Trump looks to reduce America’s trade deficit spooked the oil market in February amid concerns that the trade frictions and possible full-out trade wars would depress economic growth.
Falling commercial oil inventories across OECD markets have been supporting oil prices in recent months.
As of the end of January 2025, OECD commercial crude and other liquids inventories had fallen to 2,737 million barrels, according to estimates by the U.S. Energy Information Administration (EIA). That’s the lowest level since September 2022.
By the end of February, these inventories are expected to drop to 2,719 million barrels and further still by the end of March before starting to slowly rise in April, per EIA’s latest forecasts.
OECD industry inventories continued to decline by 26.1 million barrels to 2 737.2 million barrels as of end-December, the International Energy Agency (IEA) said this week in its monthly report for February. The OECD stocks are now 91.1 million barrels below their five-year average, the agency reckons.
Total global observed oil stocks, including in China, continued to draw in January, too.
“Anxiety over the impact of new sanctions on Russia and Iran, with fears of potential supply disruptions, triggered an upswing in prices in early January,” the IEA noted.
But it added that “Market sentiment quickly shifted to renewed concerns over the world economy amid emerging trade wars and its impact on the pace of oil demand growth.”
The supply concerns and falling global stocks boosted the price rally in January, but these bullish signals were overshadowed by early February by concerns about economic and oil demand growth amid the trade and tariff tensions. By the first week of February, crude oil prices had erased all the gains they had accumulated in 2025.
Market sentiment reverted to caution after President Trump began imposing tariffs and threatening to slap more of these.
“A two-month buying spree by speculators is currently exerting downward pressure on prices as they engage in long liquidation,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said early this month, commenting on the pullback of portfolio managers since President Trump renewed trade wars.
Since then, hedge funds and other money managers have liquidated some of their long positions and increased their shorts in crude oil futures contracts.
“In the short term, the risk of even lower prices exists, not least driven by selling from wrong-footed speculators who were net buyers of 308,000 contracts or 308 million barrels in a two month period up until January 28, at which point the first, albeit small, weekly reduction was seen,” Saxo Bank’s Hansen said.
In the short term, volatility will rule the oil market. The bullish factors of sanction risks (the return of ‘maximum pressure’ on Iran) and falling OECD inventories will clash with the bearish trade war risks and potential peace talks to end the war in Ukraine.
By Tsvetana Paraskova for Oilprice.com