Oil prices experienced a decline on Thursday following cautious signals from central bankers in the U.S. and Europe regarding further monetary policy easing. This sparked concerns about potential weak economic activity impacting oil demand in the coming year.
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Brent crude futures settled at $72.88 per barrel, marking a decrease of 51 cents or 0.7%. U.S. West Texas Intermediate (WTI) crude futures for January delivery, which expired on settlement, fell by 67 cents, or 1%, to $69.91 per barrel. The more actively traded February WTI contract saw a decrease of 64 cents, settling at $69.38 per barrel.
Central Bank Caution Fuels Economic Concerns
The Federal Reserve implemented an anticipated quarter-percentage point rate cut on Wednesday. However, Chair Jerome Powell cautioned that persistent inflation could lead to a more cautious approach towards rate cuts in the next year. This statement, coupled with the U.S. dollar reaching a two-year high, made oil more expensive for buyers using other currencies. “A less accommodative Fed in 2025 than initially expected has markets adjusting their expectations,” commented Alex Hodes, an analyst at commodities brokerage StoneX.
Meanwhile, the Bank of England maintained steady interest rates on Thursday, with policymakers divided on how to address the slowing economy. The Bank of Japan also held ultra-low interest rates on the same day, influenced by concerns over potential tariffs impacting the country’s export-dependent economy.
Potential Oil Surplus Looms
The softening economic activity raises concerns about a deeper slowdown in oil demand growth next year. Brent futures prices have already declined by over 5% this year, potentially leading to a second consecutive annual loss. This is largely attributed to the struggling Chinese economy, a major factor influencing crude oil demand.
Energy transition initiatives have also significantly impacted demand in China, the world’s leading oil importer. Sinopec, a state-backed energy giant, projected that China’s petroleum consumption will peak in 2027 due to weakening fuel demand.
Analysts widely anticipate an oil surplus in the coming year. J.P. Morgan, for instance, predicts that supply will exceed demand by 1.2 million barrels per day.
Geopolitical Factors and Supply Outlook
Potential tightening of oil supply next year hinges on potential crackdowns on Iranian oil exports. The Biden administration has intensified sanctions on Iranian entities, including recent sanctions on three vessels involved in trading Iranian petroleum and petrochemicals. However, J.P. Morgan analysts observe that these actions have had minimal impact on oil prices, suggesting that policies leading to higher energy prices are unlikely to be prioritized.
Oil Price Forecasts and Inventory Data
According to a Reuters survey of 11 brokerages, Brent crude prices are projected to average around $73 per barrel in 2025. Some support for the oil market stemmed from a decline in U.S. crude stocks by 934,000 barrels in the week ending December 13th. However, this drawdown was smaller than the 1.6 million-barrel decrease anticipated by analysts in a Reuters poll.
In conclusion, the cautious stance of central banks and concerns surrounding global economic activity have contributed to the recent decline in oil prices. The potential for an oil surplus in the coming year further adds to the complexity of the market outlook. While geopolitical factors and supply disruptions could influence prices, the overall sentiment remains cautious.
