Oil prices declined on Friday, trending towards a weekly loss due to hawkish signals from the U.S. Federal Reserve and ongoing worries about diminishing demand.
Crude prices faced pressure from a stronger dollar, which soared to a more than two-year high after the Fed indicated a slower pace of interest rate cuts in the upcoming year. On the demand side, a lack of concrete details regarding new stimulus measures in China, along with indications of decreasing fuel demand in the U.S., contributed to the downward trend.
Traders eye potential disruptions
Traders were also keeping an eye on a possible U.S. government shutdown, which is anticipated to disrupt travel and economic activity across large areas of the country. Brent oil futures set to expire in February slipped 0.5 percent to $72.49 a barrel, while West Texas Intermediate crude futures also fell 0.5 percent to $69.07 a barrel by 20:09 ET (01:09 GMT).
Read more: Crude oil prices fall 0.6 percent following Fed’s 0.25 basis point rate cut
Weekly losses for Brent and WTI
Both Brent and WTI contracts were positioned for a weekly decline of over 2 percent, with most of their losses occurring in the last two sessions. The stronger dollar continued to apply downward pressure, as the greenback surged on the expectation that U.S. interest rates would remain higher than previously anticipated in 2025.
Federal Reserve’s cautious approach
The Federal Reserve cut rates by 25 basis points as expected but effectively reduced its forecast for future cuts in 2025, now projecting only two potential reductions. The Fed expressed caution regarding persistent inflation and the resilience of the U.S. economy, as well as the uncertainty surrounding the potentially inflationary impacts of policies from incoming President Donald Trump.
Concerns about demand and oversupply
Concerns about sluggish demand and oversupply also clouded the oil market outlook. Worries about weak demand, particularly from top oil importer China, weighed heavily on prices. China’s oil imports have been on a steady decline in 2024, reflecting the country’s economic challenges amid ongoing disinflation. Although China has announced plans for aggressive fiscal spending to stimulate growth, traders are waiting for more concrete details. As the world’s largest oil importer, China’s situation has been a significant concern for oil markets in recent years.
Supply dynamics and geopolitical tensions
On the supply side, the possibility of increased production in the U.S. kept traders cautious about a potential oversupply in the coming year. Trump has promised to boost domestic oil production. However, he may also take a tougher stance on Iran, possibly imposing stricter sanctions on the country’s oil exports. This scenario could tighten global supplies, particularly as the Organization of the Petroleum Exporting Countries and its allies have recently indicated intentions to extend their current production cuts.
Market reactions to dollar strength
Oil prices fell on Thursday, driven by a stronger dollar following the Federal Reserve’s projection of a noticeably slower pace of interest rate reductions in the upcoming year. The crude markets were also affected by mixed U.S. inventory data, suggesting that fuel demand could be declining as winter approaches.
Brent oil futures for February delivery dropped by 0.5 percent to $73.02 per barrel, while West Texas Intermediate crude futures decreased by 0.6 percent to $69.60 per barrel by 20:15 ET (01:15 GMT). Despite this downturn, both contracts had seen some gains earlier in the week after reports revealed that China, the top oil importer, intends to ramp up fiscal spending in 2025 to stimulate its economy. Additionally, oil supplies are expected to tighten as the Organization of the Petroleum Exporting Countries recently decided to extend existing production cuts.
Impact of revised Fed outlook
The stronger dollar’s impact on oil prices was significant, as it reached its highest level in over two years on Wednesday after the Fed adjusted its outlook for rate cuts in 2025. The central bank now predicts only two reductions of 25 basis points each in the coming year, down from earlier expectations of four cuts. Although the Fed also executed a 25 basis point rate cut, this action was largely anticipated by market participants.
The Fed’s revised outlook caused a noticeable retreat in risk-driven markets while simultaneously bolstering the dollar. A stronger dollar typically pressures oil demand, making the commodity more expensive for international buyers. Traders voiced concerns that global economic growth might decelerate due to relatively higher interest rates, potentially limiting demand.
On Wednesday, oil prices showed minimal movement as traders exercised caution, awaiting further signals regarding interest rates. Industry data on U.S. inventories produced mixed results. Crude prices remained within a narrow range this week after experiencing gains the previous week, driven by the prospect of new U.S. sanctions on Russian oil supplies. However, this upward trend has been tempered by renewed concerns regarding declining demand in China and the likelihood of a supply surplus in the coming year. As of 20:11 ET (01:11 GMT), Brent oil futures for February delivery remained steady at $73.20 per barrel, while West Texas Intermediate crude futures held at $69.66 per barrel.
