Bulled by Inventories, Bullied by Geopolitics: Navigating Oil Markets in a Volatile Summer

The summer of 2025 is shaping up as a paradox for oil markets: robust demand for fuel is clashing with rising U.S. crude inventories and easing Middle East tensions, creating a tug-of-war between bullish and bearish forces. As investors grapple with these crosscurrents, the question remains: How can one profit from the volatility without being blindsided by geopolitical flare-ups or supply-demand imbalances?

The Inventory Build Conundrum

Recent U.S. crude oil data highlights a critical divergence between expectations and reality. The Energy Information Administration (EIA) reported a 7.1 million-barrel inventory build in late June, far exceeding forecasts of a 2.07 million-barrel draw. While this was partially reversed by a 3.9 million-barrel draw in early July, the EIA now projects global crude inventories to grow by 0.8 million barrels per day in 2025—a stark contrast to pre-2024 trends. This buildup, driven by rising non-OPEC+ production (Brazil, Canada) and weaker OECD demand, has pressured prices downward.

Despite robust distillate demand (+4.4% year-over-year), the market remains oversupplied. U.S. crude stocks now sit at 422.2 million barrels, 8% below the five-year average—a sign of lingering tightness but still supportive of bearish momentum.

Geopolitical Easing: A Double-Edged Sword

The Middle East's role in oil markets has shifted from disruptor to stabilizer. The U.S.-brokered Israel-Iran ceasefire, while fragile, has slashed geopolitical risk premiums embedded in oil prices. The EIA notes that Brent crude prices have averaged $68/b in 2025, down from $71/b in early June as fears of Red Sea supply disruptions waned.

However, complacency is risky. Houthi attacks in July 2025 briefly spiked prices to $68.38/b, underscoring how quickly tensions can reignite. Meanwhile, OPEC+'s July decision to increase production by 548,000 barrels per day—a move aimed at balancing surplus concerns—adds to the supply overhang.

Demand Resilience Amid Mixed Signals

The demand picture is nuanced. While gasoline demand dipped slightly (-1.1% year-over-year), distillate fuel demand remains a bright spot, up 4.4% year-over-year. This reflects robust industrial activity, with distillate inventories still 21% below the five-year average—a bullish signal for diesel prices.

Yet risks linger. The EIA warns that global oil demand growth could slow to 1.28 million barrels per day in 2026, as China's economic recovery remains uneven and the U.S. dollar strengthens. Investors must monitor U.S. refinery utilization rates (currently 93.9%) and distillate inventories for clues on demand sustainability.

Investment Playbook: Positioning for Volatility

1. Energy Equities: A Hedge Against Supply Shocks
   Despite near-term price pressure, energy stocks like Exxon (XOM) and Chevron (CVX) offer resilience. Their dividends and exposure to high-margin refining (distillate demand remains strong) make them defensive plays. Consider a 3–5% allocation to an energy ETF like XLE, which tracks oil majors and refiners.

2. Bullish WTI Futures: Exploit the Curve
   The contango structure in crude futures (higher prices for distant contracts) suggests expectations of future shortages. Investors could buy WTI futures expiring in late 2025 or 2026, betting on eventual inventory drawdowns.

3. Options Strategy: Protect Against Geopolitical Surprises
   Use put options on crude ETFs (USO) to hedge against sudden dips caused by Middle East flare-ups or OPEC+ compliance issues. A 5–10% allocation to put options provides downside protection without locking in losses.

4. Distillate-Specific Plays: Capitalize on Diesel Demand
   Focus on companies exposed to diesel markets, such as CFLP (Cenovus Energy) or Valero (VLO), which benefit from refining spreads. Alternatively, track distillate inventories via the EIA's weekly data—drops below 100 million barrels could trigger buying opportunities.

Final Analysis

The near-term outlook for oil prices is capped by inventory builds and geopolitical easing, but distillate demand and OPEC+ policy uncertainty offer tailwinds. Investors should avoid aggressive long bets but remain opportunistic.

• Buy the dips: Use price drops below $65/b (WTI) to accumulate energy equities or futures.
• Avoid overexposure: The macroeconomic backdrop (Fed tightening, trade wars) limits upside potential.
• Stay agile: Monitor Middle East developments and inventory reports weekly.

In a market where supply and demand are playing a high-stakes game of chess, the best strategy is to hold pieces that profit from both volatility and resilience.