Trump's Tariffs, Fed's Fears: The Double Punch Sending Oil Below $70

Macro risk is skewed to the downside in oil prices. The commodity’s precarious dance below $70 creates trading opportunities, as fundamentals point to a large surplus in 2025.

• Concern is rising over the supply of crude oil as OPEC prepares to release spare capacity.
• Economic headwinds and the threat of tariffs, along with government job cuts, are adding downside risk for oil prices.
• Traders can position themselves for a downside move with more volatility in the options market.

Crude oil prices (/CL) have dropped in recent weeks to trade below $70 per barrel. Since January, the commodity has dropped nearly 20% to trade around the lowest levels since September 2024.

The market has digested a flurry of developments this year, with the totality of risk skewed to the downside. The sell-off has likely priced in most of the developments to date, but the question for the market now is how the macro backdrop will evolve from here for crude oil prices.

Earlier this year, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, referred to as OPEC+, surprised the market by announcing it would release spare capacity onto the market starting in April.

The announcement removed a significant upside risk to the oil market, given that economic growth is slowing in the U.S. and elsewhere. The Atlanta Federal Reserve’s GDPNow model estimates real gross domestic product (GDP) growth at -1.8% for the first quarter of 2025. That would be down from 2.3% in the fourth quarter. The Trump administration’s efforts to cut government jobs and impose tariffs on trade partners are among the factors driving the decline in expectations for growth.

Meanwhile, non-U.S. supply has grown, and that trend will likely continue with OPEC preparing to release additional spare capacity. Venezuela offers one of the few supply risks to markets because the U.S removal of the Chevron (CVX) license in the country should reduce output by about 130,000 barrels per day starting in early April.

These factors—slower growth and more supply—put the risks to the market to the downside. Forecasters have adjusted their outlooks to account for the developments. HSBC Global Research now sees a surplus in the market for 2025 to the tune of about 200,000 barrels per day.

Geopolitical considerations

The geopolitical backdrop for the oil market remains complicated, but tensions have cooled so far in 2025. U.S. sanctions on Russia remain in place, but the Trump administration’s additional steps haven’t tangibly affected exports.

The U.S. and Ukraine announced yesterday that Ukraine will move forward on a ceasefire agreement with Russia that would stop the countries from attacking energy infrastructure. While it’s only a partial ceasefire, the move symbolizes a willingness to move toward ending the war.

While an end to the war could see the removal of U.S. sanctions on Russia and make it easier to move oil out of the country, Moscow has found ways to circumvent the restrictions. Russian oil tankers have unloaded product at Chinese ports, and India has also been accepting Russian crude. However, an end to the conflict could remove the aura of geopolitical tension that supports oil prices regardless of actual oil flow.

Trading crude oil

Crude oil prices dropped 3.8% in February, and March is on track to see a loss of 4%. The decline in prices has injected volatility into the product, essentially making it more enticing for options traders. Crude oil traded with an implied volatility rank (IVR) of 28.5 as of March 19, meaning volatility is still relatively subdued compared to the past 12 months of trading. Crude prices bounced from six-month lows reached earlier this month, but a sustained rally has failed to materialize.

For traders who expect downside risks to materialize and prices to drop, buying a put spread would be one way to take advantage of a price drop that would likely come naturally with an expansion in volatility. Alternatively, selling a put spread for the long side would make sense, given that volatility would likely contract further on an upside move.

Technically, there seems to be some support between 65 and 66, with swing lows near and around that level seen going back to October. A break lower could introduce prices to a zone of low liquidity where prices haven’t traded since September. That low liquidity could introduce additional volatility.

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. #@fxwestwater

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