Oil prices witnessed a slight uptick on Monday as traders reacted positively to the U.S. government successfully avoiding a shutdown over the weekend, coupled with softer inflation data from the country.Â
The primary focus remained on demand as we approach 2025, particularly with China, the leading oil importer, indicating plans for additional stimulus measures in the coming year. On the supply side, the potential for increased U.S. sanctions against Iran and Russia contributed to a tighter supply outlook.
Brent crude futures for February rose by 0.4 percent to $73.20 a barrel, while West Texas Intermediate (WTI) crude futures gained 0.4 percent to reach $69.75 a barrel by 20:19 ET (01:19 GMT).
Supportive U.S. developments boost oil prices
Oil traders welcomed the news that the U.S. government had averted a potential shutdown over the weekend. This followed President Joe Biden’s approval of a temporary spending bill that secures government funding through March.
Last week, concerns about a U.S. shutdown had intensified after President-elect Donald Trump criticized a bipartisan funding bill for its provisions favoring Democratic lawmakers and proposed an alternative bill that sought to raise the debt limit, which was ultimately rejected by lawmakers. There were worries that a government shutdown during the holiday season could disrupt travel and negatively impact fuel demand.
Additionally, oil markets found support from a weaker dollar, which retreated from over one-year highs after the PCE price index—the Federal Reserve’s preferred measure of inflation—showed lower-than-expected results for November, indicating a cooling in inflationary pressures. However, this data followed the Fed’s indication of a slower pace of rate cuts in 2025, a scenario that could dampen economic growth and hinder oil demand.
China’s demand and supply constraints shape 2025 outlook
Concerns about waning demand and rising supplies resulted in oil prices declining by over 5 percent so far in 2024. As we move into 2025, attention will be focused on whether China’s forthcoming stimulus measures can effectively stimulate economic growth.
U.S. policy under President-elect Trump, who has signaled a more protectionist approach toward China and Iran, will also be scrutinized. The U.S. may impose further sanctions on Iran’s oil sector, which would further restrict global supplies. Recent reports suggest that the U.S. is contemplating additional sanctions against Russian oil exports.
Read more: Crude oil prices face weekly decline of over 2 percent amid Fed’s demand concerns
Oil prices decline amid Fed’s hawkish signals and demand concerns
Oil prices fell on Friday, trending towards a weekly loss due to hawkish signals from the U.S. Federal Reserve and ongoing fears about diminishing demand. Crude prices faced downward pressure from a stronger dollar, which surged to a more than two-year high after the Fed indicated a slower pace of interest rate cuts for the upcoming year.
On the demand side, uncertainty regarding new stimulus measures in China, along with signs of declining fuel demand in the U.S., contributed to the downward trend. Traders were also wary of potential disruptions from a possible U.S. government shutdown, which could hinder travel and economic activity across many regions. Brent futures for February had slipped 0.5 percent to $72.49 a barrel, while WTI futures also fell 0.5 percent to $69.07 a barrel.
Weekly declines for Brent and WTI
Both Brent and WTI contracts were on track for a weekly decrease of over 2 percent, with the majority of losses occurring in the last two trading sessions. The stronger dollar continued to exert downward pressure, as the greenback rallied on expectations that U.S. interest rates would remain higher than previously forecasted in 2025.
Fed’s cautious stance
The Federal Reserve cut rates by 25 basis points, as anticipated, but effectively reduced its outlook 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, alongside uncertainties about the potentially inflationary effects of policies proposed by incoming President Trump.
Concerns about demand and surplus supplies
Concerns regarding sluggish demand and oversupply have clouded the oil market outlook. Weak demand, particularly from China, has significantly impacted prices. China’s oil imports have been steadily declining in 2024, reflecting the nation’s economic difficulties amid ongoing disinflation. While China has announced plans for aggressive fiscal spending to stimulate growth, traders are awaiting more detailed information. As the world’s largest oil importer, China’s economic situation continues to be a critical concern for oil markets.
Supply dynamics and geopolitical tensions
On the supply front, the potential for increased production in the U.S. has made traders cautious about a possible oversupply in the coming year. Trump has pledged to enhance domestic oil production, yet he may also adopt a tougher stance on Iran, potentially imposing stricter sanctions on the country’s oil exports. This scenario could tighten global supplies, especially as the Organization of the Petroleum Exporting Countries (OPEC) and its allies have recently signaled intentions to extend their current production cuts.
Market reactions to dollar strength
Oil prices dropped on Thursday, driven by a stronger dollar following the Federal Reserve’s projection of a notably slower pace of interest rate reductions in the coming year. The crude markets were also influenced by mixed U.S. inventory data, which suggested that fuel demand might be declining as winter approaches. Brent futures for February delivery had decreased by 0.5 percent to $73.02 per barrel, while WTI futures fell by 0.6 percent to $69.60 per barrel. Despite this decline, both contracts had experienced some gains earlier in the week following reports that China, the leading oil importer, plans to ramp up fiscal spending in 2025 to stimulate its economy. Additionally, oil supplies are expected to tighten as OPEC recently decided to extend existing production cuts.
Impact of revised Fed outlook
The stronger dollar had a notable impact on oil prices, reaching 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 executed a widely expected 25 basis point rate cut, this action did not surprise market participants. The Fed’s revised outlook led to a noticeable retreat in risk-driven markets while simultaneously strengthening the dollar. A stronger dollar typically pressures oil demand, making the commodity more costly for international buyers.
Traders expressed concerns that global economic growth might slow due to relatively higher interest rates, potentially limiting demand. On Wednesday, oil prices showed little movement as traders remained cautious, awaiting further signals regarding interest rates. Industry data on U.S. inventories yielded mixed results. Crude prices remained within a narrow range this week after gaining the previous week, driven by the prospect of new U.S. sanctions on Russian oil supplies. However, this upward trend was tempered by renewed concerns about declining demand in China and the likelihood of a supply surplus in the coming year. Brent futures for February delivery held steady at $73.20 per barrel, while WTI futures remained at $69.66 per barrel.
