In the short term, three factors are driving market movements in rotation: geopolitical disturbances, macroeconomic conditions, and weekly crude oil data. Among these, geopolitical tensions and Fed rate cuts represent potential bullish factors, while industry data remains bearish. With rate cuts now implemented and the Russia-Ukraine situation still uncertain, crude oil inventories remain at extremely low levels, providing underlying support. The fourth quarter, being the window when crude oil demand is most susceptible to seasonal pressure, presents opportunities to consider short positions.
**I. Demand: No Bright Spots Microeconomically, Macroeconomic Downside Risks Still Warrant Attention**
Both refinery operations and refined product demand have reached seasonal turning points. According to seasonal patterns, refineries will enter seasonal autumn maintenance from September to October. According to EIA data for the week ending September 12, refinery utilization has declined from its peak of 96.6% to the current 93.3%. Total refined product demand has also declined for two consecutive weeks. For the week ending September 12, the four-week average total demand for petroleum products was 20.671 million barrels per day, down 217,000 barrels per day week-over-week, but up 1.69% year-over-year. Asia, as the primary oil-consuming region, lacks further upward momentum in refinery operations and capacity in China and Japan during the off-season. It's also worth noting that U.S. hurricane season disruptions and refineries entering maintenance season will both drag on demand. Therefore, comprehensively speaking, crude oil demand may struggle to show strength in the fourth quarter.
Regarding global trade friction, multiple rounds of negotiations and adjustments have occurred this year. While tensions have somewhat eased compared to the first half of the year, uncertainties persist, particularly between China and the U.S. On August 12, the suspension of 24% reciprocal tariffs was extended for another 90 days, but the 20% "fentanyl tariff" remains in effect. The Federal Reserve held its interest rate meeting on September 18, lowering the federal funds rate target range by 25 basis points to 4.00%-4.25%, in line with market expectations. From oil price performance, this aligns with the conventional impact of rate cuts on oil prices - providing bullish support during the expectation phase, but once market expectations are met, it's interpreted as bullish exhaustion, with the market correcting some of the previous advance pricing. Notably, Powell's statements at the press conference require further consideration, as he believes inflation has risen somewhat and is slightly elevated, while employment is slowing with increasing downside risks. Therefore, although this rate cut is viewed as "risk management rate cutting," continuous monitoring of U.S. economic data is needed to prevent persistently declining employment data from establishing recessionary logic risks.
Looking at global economic data through August, the S&P Global Manufacturing PMI and Eurozone Manufacturing PMI have recovered above the expansion-contraction line. However, China and U.S. Manufacturing PMIs have performed poorly since the second quarter. Before China-U.S. trade negotiations reach an optimistic conclusion, demand in both countries is expected to remain under pressure.
**II. Supply: Fourth Quarter Supply Pressure Further Intensifies**
As of September 2025, the exit from the 2.2 million barrels per day voluntary production cut plan was completed a full year ahead of schedule. The second tier of 1.65 million barrels per day voluntary production cuts was announced at the September OPEC+ meeting to be flexibly exited based on market conditions, confirming a 137,000 barrels per day oil production increase in October. Notably, unlike the previous round of production cut exits, this time there is no specific exit plan, but rather month-by-month decisions based on circumstances, leaving uncertainty in the timing. However, we can glean some insight into OPEC+'s underlying production intentions from the latest compensatory production cut plan announced simultaneously.
According to the seven-country compensatory production cut plan announced in April this year, most reductions were concentrated in summer, the peak consumption season, and most have now been implemented, with production cuts decreasing monthly starting in the fourth quarter. However, the latest September compensation plan represents a complete reversal of the original plan. Not only are fourth quarter production cuts reduced compared to the original plan, but they also show a pattern of monthly increases. We believe this change reflects OPEC+'s view that current oil price valuations remain profitable, leading them to slow compensatory production cuts while simultaneously increasing production. Therefore, despite not setting a clear production increase roadmap, once oil prices rebound, production increase willingness may rapidly strengthen. Moreover, OPEC+ representatives will hold meetings in Vienna for preliminary discussions on procedures for updating member country capacity estimates, potentially creating room for further production releases.
On the other hand, non-OPEC+ countries will also increase fourth quarter supply pressure. U.S. crude oil production continues to set new records since last year. Although active rig counts declined rapidly in the second quarter due to low oil price impacts, third quarter oil prices have consistently maintained around the $65 shale oil production cost level, and rig counts have begun recovering. U.S. crude oil production is expected to remain at high levels through the year. Additionally, a significant portion of global crude oil supply growth in 2025 comes from non-OPEC+ countries. Beyond the U.S., Canada, Brazil, Guyana, and Argentina are major sources of incremental supply. According to EIA predictions, Brazil's incremental production this year will mainly materialize in the third quarter, especially in September, while Canada's second half incremental production will primarily appear in the fourth quarter. Combined production from the four main non-U.S., non-OPEC+ supply countries is expected to continue rising in the fourth quarter, peaking in November, intensifying fourth quarter supply pressure, with supply growth rates expected to further increase in 2026.
**III. Inventory: Low Inventory Provides Short-term Oil Price Support, Medium-term Downstream Inventory Faces Upward Transmission Pressure**
Since the third quarter, low crude oil inventories have consistently supported WTI oil prices above $60. Therefore, despite growing market concerns about oversupply, according to the latest EIA data, crude oil inventories again declined by an unexpected 9.285 million barrels to 415.36 million barrels, causing oil prices to still face significant resistance on the downside. From the refined products perspective, inventories of major products gasoline and distillates are both not low. Particularly after the gasoline demand peak season ends and distillates take over the demand baton, the market will focus more attention on distillate performance. Distillates are currently building inventory counter-seasonally. According to EIA data for September 12, distillate inventories increased by 4.046 million barrels week-over-week to 124.68 million barrels, warranting caution about pressure from downstream inventory transmission to the crude oil sector.
**IV. Future Strategy Recommendations**
Short-term: Three factors - geopolitical disturbances, macroeconomic conditions, and weekly crude oil data - are driving market movements in rotation. With rate cuts now implemented and Russia-Ukraine uncertainties persisting, crude oil inventories remain at extremely low levels, providing underlying support. Oil prices are expected to continue consolidating primarily within the WTI $60-65 range after pullbacks, with pre-holiday short position profit-taking advised to avoid risks.
Medium to long-term: With OPEC+'s second round of production increases beginning and the fourth quarter entering crude oil's seasonal demand weakness, supply-demand surplus conditions will further intensify through year-end and into the first quarter next year. Although OPEC+ has not clarified its production increase roadmap, oil price rallies will enhance OPEC+ production increase enthusiasm, consistently pressuring oil prices from above. Therefore, the medium to long-term approach of selling on rallies remains unchanged. Watch for rebound opportunities from recurring geopolitical situations to establish positions. For conservative approaches, consider pairing with out-of-the-money call options to hedge against sudden geopolitical upside breakout risks.