The first trading day of 2025 saw oil prices surge more than $1 a barrel, fueled by renewed investor confidence in China’s economic growth and fuel demand following President Xi Jinping’s commitment to pro-growth policies. However, a significant build in U.S. gasoline and distillate inventories moderated the price rally.
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Brent crude futures settled at $75.93 a barrel, marking a 1.7% increase or $1.29. U.S. West Texas Intermediate (WTI) crude saw a similar rise, settling at $73.13 a barrel, up $1.41 or 2%.
China’s Growth Outlook Fuels Optimism
President Xi’s New Year’s address, pledging more proactive policies to stimulate economic growth in 2025, sparked optimism among investors. This positive sentiment comes despite a Caixin/S&P Global survey revealing slower-than-anticipated growth in China’s factory activity in December. Concerns surrounding potential tariffs proposed by then U.S. President-elect Donald Trump contributed to this slowdown.
Interestingly, some analysts interpret weaker Chinese economic data as a potential catalyst for increased oil prices. The rationale is that such data could prompt Beijing to accelerate stimulus measures, ultimately boosting fuel demand. While December’s official survey indicated minimal growth in manufacturing, the services and construction sectors performed better, suggesting that policy stimulus is beginning to impact certain segments of the economy.
Swelling US Inventories Cap Gains
The Energy Information Administration (EIA) released U.S. oil inventory data a day later than usual due to the New Year holiday. The report revealed a substantial increase in gasoline and distillate inventories, applying downward pressure on oil prices. Gasoline stocks surged by 7.7 million barrels, reaching 231.4 million barrels, while distillate stockpiles, encompassing diesel and heating oil, grew by 6.4 million barrels to 122.9 million barrels.
Jim Ritterbusch of Ritterbusch and Associates attributed the substantial product stock builds to an unexpected dip in demand. This factor played a significant role in tempering the oil price rally. In contrast, crude stockpiles decreased by 1.2 million barrels to 415.6 million barrels, a smaller decline than the 2.8-million-barrel draw anticipated by analysts in a Reuters poll.
Geopolitical Risks and Trump’s Economic Policies Add to Uncertainty
As trading commenced in the new year, market participants also grappled with heightened geopolitical risks and the potential impact of then incoming President Trump’s economic policies. IG market analyst Tony Sycamore highlighted the importance of the upcoming U.S. ISM manufacturing release as a key indicator for crude oil’s next directional move.
Sycamore observed that WTI’s weekly chart is exhibiting a tightening range, suggesting the potential for a significant price swing in the near future. He advised a cautious approach, recommending waiting for a decisive break from the current range before taking a position.
Looking Ahead: Oil Prices Expected to Remain Constrained
A Reuters poll indicated that oil prices are likely to remain relatively subdued in 2025, hovering around $70 a barrel. This would represent a third consecutive year of decline, following a 3% drop in 2024. Weak demand from China and increasing global supplies are anticipated to offset efforts by OPEC+ to support the market.
Adding to the complex picture, Russia halted gas pipeline exports through Ukraine on New Year’s Day due to the expiration of the transit agreement. While the European Union secured alternative supply sources in anticipation of this disruption, Hungary will continue receiving Russian gas via the TurkStream pipeline under the Black Sea. This event underscores the ongoing geopolitical factors that can influence energy markets.
Conclusion: A Mixed Start to 2025 for Oil
The first trading day of 2025 presented a mixed outlook for oil markets. While optimism surrounding China’s economic growth prospects spurred initial price gains, a substantial build in U.S. inventories tempered the rally. Looking ahead, geopolitical risks, the evolving economic landscape under the new U.S. administration, and the delicate balance between global supply and demand will continue to shape the trajectory of oil prices in the coming year.
