Oil prices climbed to their highest level in over two months on Monday, as traders anticipated improved demand from China, the world’s largest oil importer. However, the strength of the dollar limited significant gains.
Crude prices have experienced two consecutive weeks of increases, driven by expectations of rising demand in China, particularly as Beijing is set to introduce additional stimulus measures in the coming months. The onset of colder weather in both the U.S. and Europe is also anticipated to bolster oil demand, particularly for distillates.
Despite these positive factors, the strength of the dollar constrained major gains in crude prices, with the greenback reaching its highest level in over two years ahead of a series of important economic reports this week. Brent oil futures for March delivery rose by 0.2 percent to $76.63 a barrel, while West Texas Intermediate (WTI) crude futures increased by 0.2 percent to $73.36 a barrel as of 20:11 ET (01:11 GMT).
Read more: Oil prices climb on hopes for Chinese stimulus with Brent at $72.68 and WTI at $76.08
Cold weather and stimulus measures fuel demand expectations
The chilly weather sweeping across the U.S. and Europe is expected to drive up demand for heating oil, potentially leading to tighter supplies in both regions. A powerful winter storm is hitting large areas of the U.S., bringing snow, ice, and sub-zero temperatures, driven by a polar vortex, which is similarly expected to lower temperatures across Europe.
In China, traders are preparing for more stimulus from Beijing in response to ongoing signs of economic weakness. Inflation data set to be released later this week is also expected to provide additional insights regarding the world’s largest oil consumer.
Oil prices have been pressured by the strong dollar, which surged to a two-year high last week amid increasing confidence that the Federal Reserve will slow its interest rate cuts in 2025. Two Federal Reserve officials reinforced the central bank’s recent message that the fight against inflation is ongoing, leading to heightened caution that interest rates will remain elevated for an extended period. Their remarks have shifted attention to a series of crucial economic reports expected this week, particularly nonfarm payroll data due on Friday.
Protectionist policies and their impact on the dollar
The anticipated protectionist policies under the incoming administration of President Donald Trump are also expected to support the dollar. A stronger dollar tends to pressure oil demand by making crude oil more expensive for international buyers.
On Friday, oil prices saw a slight uptick, moving toward a second consecutive weekly gain as optimism about China’s economic recovery enhanced market sentiment. Brent oil futures increased by 0.3 percent to $72.68 a barrel, while WTI crude futures, set to expire in February, rose by 0.2 percent to $76.08 a barrel. The previous session had recorded significant gains following data indicating growth in Chinese manufacturing activity.
Both oil contracts are on track for a second consecutive weekly increase, with WTI expected to rise by 3.6 percent and Brent anticipated to increase by nearly 3 percent for the week.
Stimulus measures in China boost oil prices
Recent data revealed a modest expansion in China’s factory activity in December, according to a Caixin/S&P Global survey released on Thursday, although the growth was below expectations. An official report from earlier in the week showed minimal growth in manufacturing activity, while the services and construction sectors performed better, suggesting that policy stimulus is beginning to take effect in certain areas.
Beijing has indicated plans for a more accommodative monetary policy in 2025 and has implemented significant stimulus measures since late September to stimulate its sluggish economy.
EIA data and oversupply concerns
In the U.S., crude oil inventories experienced a decline, while gasoline and distillate stocks saw notable increases due to weakened demand during the week ending December 27, according to the Energy Information Administration (EIA) report released on Thursday. The EIA noted a decrease in crude inventories by 1.2 million barrels last week, which fell short of analysts’ expectations for a 2.8 million-barrel decline.
Recent EIA data indicates that U.S. oil production remains near record highs, and the incoming Trump administration is likely to pursue policies aimed at boosting domestic fossil fuel output. This situation emerges amid concerns about potential oversupply due to expected production increases in non-OPEC countries, emphasizing an oversupply scenario. The International Energy Agency (IEA) recently indicated that the oil market will remain sufficiently supplied, despite forecasts of rising demand in 2025.
