Oil prices experienced a modest increase on Tuesday, remaining within a narrow trading range as traders grappled with the possibility of a supply surplus and anticipated softening demand in the upcoming year.
With the Christmas holiday approaching, trading volumes were low, while a strong dollar added pressure on oil prices following the Federal Reserve’s indication of a slower pace of interest rate cuts in 2025. By 20:22 ET (01:22 GMT), Brent oil futures for February rose by 0.4 percent to $72.91 a barrel, and West Texas Intermediate (WTI) crude futures also increased by 0.4 percent, reaching $69.51 a barrel.
Oil suffers losses in 2024 amid demand concerns
So far in 2024, both Brent and WTI prices have fallen by approximately 5 percent, largely due to ongoing worries about declining demand in China. The world’s largest oil importer has seen its oil imports decrease throughout the year, struggling with sluggish economic growth. Despite outlining plans for increased fiscal spending and stimulus measures in the coming year, markets are still awaiting more definitive details on these initiatives.
The rise in electric vehicle adoption in China has also contributed to reduced fuel demand within the country. Both OPEC and the International Energy Agency (IEA) have projected slower demand growth in 2025, attributing it to the weakening demand in China, which may also face heightened economic challenges from a renewed trade conflict with the U.S. under Donald Trump.
Caution prevails amid supply uncertainties; U.S. inventory data expected
Oil markets are cautious regarding a potential supply surplus in 2025. Although OPEC has recently agreed to extend its current supply cuts until at least mid-2025, production levels elsewhere may rise. U.S. oil production remains near record highs and could increase further in the coming year, especially with Trump’s promises to boost domestic energy production.
Later on Tuesday, the American Petroleum Institute is set to release U.S. inventory data, which could provide additional insights into oil production and supply levels.
Read more: Oil prices rise 0.4 percent amid U.S. shutdown relief, positive inflation trends
Positive developments support oil prices
On Monday, oil prices saw a slight increase as traders reacted positively to the U.S. government’s successful avoidance of a shutdown over the weekend, along with softer inflation data. February Brent crude futures rose by 0.4 percent to $73.20 a barrel, while WTI crude futures gained 0.4 percent, reaching $69.75 a barrel.
The announcement that the U.S. government had averted a potential shutdown was welcomed by oil traders. This came after President Joe Biden approved a temporary spending bill that ensures government funding through March. Prior to this, concerns about a government shutdown had escalated following President-elect Trump’s criticism of a bipartisan funding bill and his proposal for an alternative that aimed to raise the debt limit, which was ultimately rejected.
Additionally, oil markets found support from a weakening dollar, which retreated from year-long highs after the PCE price index—the Federal Reserve’s preferred inflation measure—revealed lower-than-expected results for November, suggesting a moderation in inflationary pressures. However, this data followed the Fed’s signals regarding a slower pace of rate cuts in 2025, a situation that could dampen economic growth and negatively impact oil demand.
Focus on China’s demand and supply constraints for 2025
Concerns surrounding declining demand and increasing supplies have led to oil prices dropping over 5 percent in 2024. As we approach 2025, attention will turn to whether China’s anticipated stimulus measures can effectively boost economic growth. U.S. policy under President-elect Trump, who has indicated a more protectionist stance toward China and Iran, will also be closely watched. The U.S. may impose further sanctions on Iran’s oil sector, which could further tighten global supplies. Recent reports also suggest that the U.S. is considering additional sanctions on Russian oil exports.
Oil prices decline amid Fed’s hawkish signals and demand concerns
On Friday, oil prices fell, heading toward a weekly loss due to hawkish signals from the U.S. Federal Reserve and ongoing fears of diminishing demand. Crude prices faced downward pressure from a stronger dollar, which rose to a more than two-year high following the Fed’s indication of a slower pace of interest rate cuts in the upcoming year.
On the demand front, uncertainty regarding new stimulus measures in China, coupled with signs of decreasing fuel demand in the U.S., contributed to the downward trend. Traders were also apprehensive about potential disruptions from a possible U.S. government shutdown, which could impact travel and economic activity in various regions. By the end of the day, February Brent futures had slipped 0.5 percent to $72.49 a barrel, while WTI futures also fell by 0.5 percent to $69.07 a barrel.
