Oil prices dropped on Thursday, influenced by a stronger dollar following the Federal Reserve’s forecast of a significantly slower pace of interest rate reductions in the upcoming year. Crude markets were also navigating mixed U.S. inventory data, suggesting that fuel demand may be waning as winter approaches.
Brent oil futures for February delivery decreased by 0.5 percent to $73.02 per barrel, while West Texas Intermediate crude futures fell by 0.6 percent to $69.60 per barrel by 20:15 ET (01:15 GMT). Despite this decline, both contracts recorded some gains earlier this week after reports indicated that China, the leading oil importer, plans to increase fiscal spending in 2025 to boost its economy. Additionally, oil supplies are expected to tighten, as the Organization of Petroleum Exporting Countries recently agreed to extend existing production cuts.
Impact of a stronger dollar on oil prices
The dollar surged to its highest level in over two years on Wednesday after the Fed revised its outlook for rate cuts in 2025. The central bank now anticipates only two reductions of 25 basis points each in the coming year, down from previous expectations of four cuts. Although the Fed also implemented a 25 basis point rate cut, this move was largely anticipated by the markets.
The Fed’s revised outlook triggered a notable retreat in risk-driven markets while simultaneously strengthening the dollar. A stronger dollar tends to pressure oil demand, as it makes the commodity more expensive for international buyers. Traders expressed concerns that global economic growth might slow due to relatively higher interest rates, potentially limiting demand.
Support for oil prices from Chinese economic prospects and supply constraints
Crude prices found some support this week, particularly following indications of more extensive fiscal stimulus in China, the top oil importer. Diminished demand from China has been a major concern for oil markets, especially as the nation faces a prolonged economic downturn. The expectation of tighter supplies also provided some backing for crude prices, as Kazakhstan indicated its intention to adhere to recent production quotas set by OPEC+. The cartel has agreed to extend ongoing production cuts until at least the second quarter of 2025 amid ongoing worries about slowing demand.
On Wednesday, oil prices exhibited minimal movement as traders opted for caution, awaiting further signals regarding interest rates. Industry data concerning U.S. inventories presented mixed results. Crude prices have largely stayed within a narrow range this week after experiencing gains the previous week, driven by the potential for new U.S. sanctions on Russian oil supplies. However, this upward trend has been tempered by renewed anxieties regarding diminishing demand in China and the possibility of a supply surplus in the year ahead. As of 20:11 ET (01:11 GMT), Brent oil futures for February delivery held steady at $73.20 per barrel, while West Texas Intermediate crude futures remained unchanged at $69.66 per barrel.
Read more: Crude oil prices show little movement ahead of Fed meeting
U.S. crude inventories show decline, but product stockpiles increase – API
Data from the American Petroleum Institute released on Tuesday evening indicated that U.S. oil inventories fell by 4.7 million barrels in the week ending December 13, exceeding expectations of a 1.9 million barrel draw. However, gasoline inventories rose by 2.4 million barrels, and distillate stocks increased by 700,000 barrels. This suggests that while overall U.S. supplies are tightening, fuel demand may be weakening due to reduced winter travel, a trend likely to continue for at least the next two months.
This recent inventory draw follows two consecutive weeks of significant builds. Historically, API data has often foreshadowed similar findings in government inventory reports, which are scheduled for release later on Wednesday.
On Tuesday, oil prices dipped slightly in response to disappointing economic data from China that affected market sentiment. As of 20:41 ET (01:42 GMT), Brent oil futures fell by 0.2 percent to settle at $73.81 per barrel, while WTI crude oil futures decreased by 0.1 percent to $70.20 per barrel. Both February contracts experienced declines on Monday, as worries over sluggish demand were intensified by China’s underwhelming economic performance.
Weak economic data from China clouds demand outlook
China released important economic indicators for November on Monday, presenting a mixed scenario. Industrial output met expectations with a modest increase, indicating some improvement in that sector. However, retail sales growth significantly slowed, falling short of forecasts and highlighting ongoing weaknesses in consumer spending. Additionally, home prices dropped by 5.7 percent year-over-year in November, following a 5.9 percent decline in October, underscoring persistent challenges in the real estate market.
These developments raise concerns for the oil market, particularly given that China is the world’s largest crude importer. The slowdown in retail sales signals fragile domestic demand, which could weaken energy consumption. Moreover, the modest rise in industrial output suggests that manufacturing activities are not robust enough to significantly boost oil demand. Recent indications from Beijing regarding new stimulus measures have also been lukewarm.
