Oil Entering Seasonally Softer Period: CIBC's Babin

The global oil market is entering a seasonally softer period, driven by a confluence of weakening OPEC+ influence, slowing Chinese demand, and shifting geopolitical risk premiums. These factors are creating a fragile equilibrium for crude prices, with energy investors facing a critical juncture to reassess their exposure to oil-linked assets.

OPEC+'s Diminishing Leverage

OPEC+'s recent production decisions highlight a strategic pivot to regain market share but underscore its waning ability to control prices. In Q2 2025, the group accelerated the unwinding of 2.2 million barrels per day (bpd) in voluntary cuts, boosting output by 411,000 bpd in August. While this move aimed to counter U.S. and non-OPEC production gains, it has exacerbated global oversupply. The International Energy Agency (IEA) now forecasts a 1.9 million bpd inventory build in H2 2025, with Brent crude averaging $60 per barrel in Q4.

This aggressive production ramp-up has come at a cost. Saudi Arabia, the de facto leader of OPEC+, is leveraging its fiscal flexibility to absorb lower revenues, but smaller members like Iraq and Algeria face liquidity strains. For investors, this signals a fragmented OPEC+ unable to act as a unified price stabilizer. Energy stocks in these countries may underperform, while U.S. shale producers—benefiting from higher output and lower breakeven costs—could outperform.

China's Demand Slowdown

China's role as a global oil demand engine is waning. The IEA revised its 2025 demand growth forecast to 680,000 bpd, down from 860,000 bpd in 2024, as electric vehicle adoption and infrastructure shifts curb consumption. Gasoline demand grew just 0.32% in H1 2024, while diesel fell 3.52%. This trend is structural, not cyclical: China's high-speed rail network and natural gas trucks are permanently reducing oil dependency.

For energy investors, this means China's demand growth will no longer offset declines in OECD markets. The burden of absorbing global supply will shift to Africa, India, and Southeast Asia—regions with slower growth trajectories. This imbalance increases the likelihood of prolonged sub-$70 oil prices, pressuring refining margins and upstream capex.

Geopolitical Risk Premiums: A Double-Edged Sword

Geopolitical tensions remain a wildcard, but their pricing into oil markets is becoming less predictable. CIBC's Rebecca Babin notes that risk premiums have narrowed from $7–$9 per barrel in early 2024 to $3–$5, as traders grow comfortable with the status quo in the Middle East. However, this complacency is fragile. A renewed Iran-Israel conflict or U.S. sanctions on Russian oil could reignite premiums, sending Brent crude to $80+ per barrel.

The Trump-Putin-Zelenskiy diplomatic dance in August 2025 exemplifies this volatility. While peace talks stabilized prices temporarily, the absence of a ceasefire left markets in limbo. Investors must hedge against both scenarios: a “peace dividend” that drives prices lower or a breakdown in negotiations that triggers a spike.

Investment Implications and Strategic Adjustments

Energy investors should prepare for a dual challenge: weaker fundamentals and heightened volatility. Here's how to position portfolios:

1. Hedge Against Oversupply: Short-term crude futures or options on WTI/Brent can protect against price declines. Consider underweighting OPEC+-linked equities (e.g., Saudi Aramco, PDVSA) and overweighing U.S. shale (e.g., Chevron, Pioneer).
2. Diversify into Alternatives: Gold (GLD) and uranium (URA) remain effective hedges against geopolitical shocks. Renewable energy infrastructure (e.g., NextEra Energy) could benefit from long-term energy transition trends.
3. Monitor Policy Shifts: The U.S. Federal Reserve's September rate cut (priced at 93% by futures) could weaken the dollar, indirectly supporting oil prices. Track Trump's tariff policies on Russian oil and India's role as a key buyer.

Conclusion

The oil market is at a crossroads. OPEC+'s production surge, China's demand slowdown, and shifting geopolitical premiums are converging to create a bearish near-term outlook. While short-term volatility remains a risk, the structural undercurrents—energy transition, fragmented supply chains, and weaker demand growth—suggest a prolonged period of underperformance for crude-linked assets. Investors must act decisively to rebalance portfolios, prioritize liquidity, and hedge against both directional and geopolitical risks. The era of stable oil prices is over; adaptability is now the key to survival.