The sell-off in oil prices has intensified, driven by the escalating trade war and increasing recession risks in the US. According to Danske Bank’s FX analyst, Frederik Romedahl, the recent OPEC+ decision has removed any stabilising influence on declining oil prices.
Romendahl notes that if major nations retaliate or if the US implements substantial tariff hikes, oil prices could potentially fall below USD60 per barrel. This situation underscores the volatile environment affecting the oil market currently.
Pressures on the Oil Market
What Romedahl is pointing to is a rapidly shifting set of pressures on the oil market, largely external and rooted in policy moves, both current and anticipated. OPEC+ has stepped away from its previous approach of cushioning price weakness through coordinated supply restrictions. Without that buffer, futures markets are now left more exposed to broad economic data and political posturing. For traders, that means less predictability and greater dislocations between spot and forward pricing.
We’re already seeing Brent contracts struggle to find support, which is as much a reflection of sentiment as it is of physical supply expectations. With trade tensions compounding fears of a global slowdown, speculative positioning has tilted more bearish. Open interest in downside options is rising, highlighting a shift in risk appetite. There’s a growing skew between calls and puts, implying more are bracing for further softness than expecting any swift rebound.
For us navigating these markets, there’s now a practical need to treat demand expectations as more reactive to economic signals than they have been in the past. Manufacturing indices, particularly from the US and China, are not simply general barometers—they’re now becoming directional cues for energy pricing. Weekly oil inventory data may still cause short-term moves, but the wider trends hinge on whether a slowdown is being priced into GDP forecasts.
Derivative traders who lean on volatility plays should note the recent widening in implied versus realised volatility. As correlations between energy assets and macro indicators tighten, it’ll be increasingly important to look across asset classes. FX volatility, driven by tariff headlines and central bank guidance, is feeding into crude pricing—positions that fail to factor this in may misjudge duration risk.
More tactically, there’s value in monitoring the forward curve structure. We’ve seen timespreads flatten or even invert, indicating that the market no longer expects tightness ahead. Calendar spreads are giving forward-looking signals that options markets have only just begun to reflect. That divergence presents opportunity if timed correctly, but also higher risk if hedges lag sentiment.
Impact on Hedging Strategies
Given the current trajectory, models based on supply-side metrics alone are likely to fall short. Demand assumptions need to be stress-tested under multiple recessionary simulations rather than base-case expectations. It speaks to the importance of layered positioning: directional bias, volatility exposure, and a live watch on correlated assets such as metals, freight, and even high-yield credit.
We’re also in a situation where traditional hedging strategies may underdeliver. With price floors softening and technical levels being repeatedly breached, one-sided protection may not hold as it used to. Adjusting delta with more frequent rebalancing, and rethinking strike selection in light of potential downside shocks, becomes essential.
In Weeks ahead, focus should remain on headline timing and market liquidity. Thinner volumes during reactive periods are likely to exaggerate price swings. Conversely, retracements may be sharp and short-lived if headline risks fade, offering quick reversals that favour nimble positioning.
There’s also the secondary issue of inflation expectations. Though seemingly displaced now by recession worries, they still matter for oil through the lens of monetary policy. Rate cuts priced in can weaken the dollar, which in turn could offer some partial support to commodities—but only if broader risk appetite improves in parallel.
Traders would do well to reassess their assumptions not just weekly, but almost daily, as volatility regimes are shifting more abruptly. Reaction functions from policymakers—especially those in trade and monetary domains—are increasingly driving price paths more than inventory reports or refinery runs.
In such an environment, defending convexity isn’t optional.
