The current crude oil market exhibits a clearly bearish medium-to-long-term outlook from a supply-demand logic perspective. Weak demand due to economic slowdown, combined with supply-side pressure from OPEC+ production increases, forms a structurally bearish pattern. However, this bearishness has been gradually realized and largely priced in by the market since last year, leading to a stabilizing price floor. Concurrently, marginal bullish factors are emerging: escalating geopolitical conflicts coupled with heightened market inflation expectations are driving a marginal rebound from low levels, accompanied by a pattern of expanding volatility due to these conflicts. We anticipate this pattern of low-level rebounds and amplified volatility will persist for a considerable time, becoming a dominant feature of the crude oil market. This report argues that while supply-demand bearishness dominates the medium-to-long-term trend, marginal geopolitical bullishness will provide short-term support. Investors should monitor volatility changes and adopt defensive strategies to cope with magnified uncertainty.
The crude oil market in 2025 is entering a critical turning point, marked by a stark contrast between bearish supply-demand fundamentals and marginal geopolitical bullishness. As macro-financial strategy analysts, we must examine this dynamic from both the supply-demand logic and marginal factors dimensions, avoiding the mistake of interpreting short-term fluctuations as the end of a trend. The current global environment is complex: persistent economic slowdown pressures, frequent geopolitical conflicts, and fluctuating inflation expectations. As a sensitive asset, crude oil's price action reflects the amplification of macro uncertainties. Although the supply-demand bearishness is evident, the market has already largely priced in these changes, resulting in a firmer price floor. Marginal bullish factors are emerging, driving rebounds from lows and expanding volatility. This report is divided into two parts: first, analyzing the medium-to-long-term bearish supply-demand state and the extent to which it has been priced in; second, exploring the emergence of marginal bullish factors and the continuation of the volatility pattern. Through this framework, we observe that the crude oil market is transitioning from being dominated by structural bearishness to being led by marginal volatility, requiring investors to be wary of geopolitically-driven short-term sharp movements.
From a supply-demand perspective, crude oil is currently in a clearly bearish medium-to-long-term state.
Demand-side weakness, stemming from the global economic slowdown, presents a structural pressure. This weakness arises from diminishing global economic growth momentum, with simultaneous slowdowns in industrial activity and consumer demand. We believe that during a downward economic cycle, the elasticity of crude oil demand decreases, making a rapid rebound difficult and forming the basis for medium-to-long-term bearishness. Compared to previous expansion periods, the current demand weakness is more structural, as the growth slowdown in major economies has shifted from cyclical to trend-based, meaning demand-side pressure will continue to dominate the market.
We believe this demand weakness is particularly pronounced amidst heightened global uncertainty. The economic downturn reduces willingness for energy consumption, amplifying the bearishness for crude oil as a cycle-sensitive asset. Historical experience shows that during similar periods, demand weakness often dictates the medium-to-long-term price direction, and investors should be cautious of this structural shift.
Further analysis indicates that demand-side weakness reflects a deep adjustment within the economic cycle. We believe this pressure is stronger during a synchronized global slowdown, making a quick recovery in crude oil demand challenging. Compared to historical expansion phases, the current weakness is more persistent, dominating the medium-to-long-term bearish landscape.
On the supply side, persistent pressure from OPEC+ production increases constitutes another layer of medium-to-long-term bearishness. This production increase strategy aims to stabilize market share but simultaneously heightens the risk of global supply surplus. We believe that against the backdrop of weak demand, OPEC+ production increases further reinforce the bearish structure, transforming supply pressure from cyclical to structural and disrupting market balance.
We contend that OPEC+ production increases exacerbate the supply glut in the current environment, resulting in a stronger bearish effect. Historical parallels indicate that such supply additions often lead to sustained pressure on the price floor. Furthermore, we believe the supply-side increase strategy amplifies surplus risks when demand is weak. We view this pressure as structural, difficult to reverse in the short term, and thus a dominant factor in the medium-to-long-term bearish outlook.
This bearish supply-demand situation has been gradually realized and largely priced in by the market since last year, with prices already reflecting most negative expectations. We believe that the full pricing-in of bearish factors suggests the market's digestion of supply-demand pressures is nearing its end, leading to a stabilizing price floor and preventing further significant declines. Changes in CFTC managed money positions illustrate this; the continuous decline in net long positions last year has reached a point where further decreases are difficult, and funds have begun tentatively increasing long positions and reducing short positions to test for a potential reversal in the crude oil market.
Meanwhile, bullish factors for crude oil are emerging at the margin.
The escalation of geopolitical conflicts represents a marginal bullish impact. These conflicts disrupt supply chains and heighten market risk aversion. We believe that against the bearish supply-demand backdrop, geopolitical factors provide short-term support, pushing prices to rebound from low levels.
We argue that geopolitical conflicts amplify the bullish effect in an uncertain environment. Historical periods show that such factors often dominate short-term volatility. Simultaneously, these geopolitical disturbances rapidly increase volatility, sharply amplifying price fluctuations within the bottom range.
Enhanced market concerns about inflation expectations further reinforce the marginal bullish push. Investor worries about rising price pressures increase demand for crude oil as an inflation hedge. We believe these expectations remain stubborn even during an economic downturn, causing the bullish effect to manifest marginally.
In an environment of strengthening inflation expectations, macro allocation funds in the market may begin gradually allocating to crude oil assets, thereby slowly altering the downward trend. Furthermore, within the context of expectations for a broad commodity bull market, declines in assets like precious metals could fuel expectations of a commodity cycle rotation, subsequently attracting allocation funds into the crude oil market.
Consequently, the current pattern of marginal rebounds from low levels, accompanied by expanding volatility due to geopolitical conflicts, has emerged. We believe this pattern reflects the full pricing-in of bearish factors, with marginal bullishness dictating short-term behavior, making expanded volatility the new norm.
We argue that low-level rebounds and expanded volatility are particularly evident when uncertainty intensifies, signaling a market shift from trend trading to volatility trading.
We expect this pattern to continue for a considerable period, becoming a dominant characteristic of the crude oil market. We believe the persistence of geopolitical and inflation factors will sustain this volatility pattern, preventing prices from quickly reverting to the bearish trend. The continuation of this pattern depends on geopolitical dynamics, but the probability remains high in the current environment. The pattern's persistence is stronger amid heightened uncertainty; we believe it may become a new normal.
The dynamics of the crude oil market have macro implications and strategy considerations.
A balance exists where medium-to-long-term supply-demand bearishness dominates, but marginal bullishness provides a short-term buffer, creating a dualistic structure for the crude oil market. This balance is particularly typical under global uncertainty, resulting in a stabilizing price floor but intensified volatility. This equilibrium reduces systemic downside risk but increases short-term uncertainty.
Crude oil dynamics will transmit to global assets: low-level rebounds support energy-related sectors, while expanded volatility amplifies the volatility of risk assets. We believe this transmission effect strengthens the demand for safe-haven assets during an economic downturn. We contend that the transmission effect will influence USD and commodity allocations. We believe the strategic focus at the current stage lies in volatility management. Defensive allocation is crucial in the present environment; before the emergence of a new round of policy-induced bearishness, attention should be paid to marginal bullish factors.
In summary, medium-to-long-term supply-demand bearishness dominates crude oil but is largely priced in, leading to a stabilizing price floor. Marginal bullish factors from geopolitical conflicts and inflation expectations are driving low-level rebounds, and the pattern of expanded volatility is expected to persist, becoming a market常态 (norm). The macro logic indicates that as this dualistic structure continues in an uncertain environment and before a new clear trend emerges, investors need to shift towards defense and volatility management.