Global Oil Market Update
Oil prices rose on Tuesday after data showed China’s manufacturing activity expanded in December, but they are on track to end lower for a second consecutive year due to demand concerns in top consuming countries.
Brent Crude Futures Rise 0.8% to $74.59 per Barrel
Brent crude futures rose 60 cents, or 0.8 percent, to $74.59 a barrel as of 08:30 a.m. Saudi time. This increase comes after data showed China’s manufacturing activity expanded for a third straight month in December but at a slower pace.
US West Texas Intermediate Crude Gains 0.9% to $71.61 per Barrel
US West Texas Intermediate crude gained 62 cents, or 0.9 percent, to $71.61 a barrel. For the year, Brent declined 3.2 percent, while WTI was down 0.1 percent.
China’s Manufacturing Activity Expands for Third Straight Month
China’s manufacturing activity expanded for a third straight month in December but at a slower pace, an official factory survey showed on Tuesday, suggesting a blitz of fresh stimulus is helping to support the world’s second-largest economy.
According to Reuters, Chinese authorities have agreed to issue a record 3 trillion yuan ($411 billion) in special treasury bonds in 2025 to revive economic growth. This move has led to a stronger yuan and higher interest rates in China, which could lead to lower oil demand.
OPEC and IEA Cut Oil Demand Expectations for 2025
A weaker demand outlook in China has forced both OPEC and the International Energy Agency (IEA) to cut their oil demand expectations for 2025. OPEC and its allies earlier this month delayed their plan to start raising output until April 2025 against a backdrop of falling prices.
The IEA expects global oil supply to exceed demand in 2025 even if OPEC+ cuts remain in place, as rising production from the US and other outside producers outpaces sluggish demand. This has led to concerns about a surplus of oil in the market, which could lead to lower prices.
Declining US Crude Stockpiles Support Oil Prices
While a weak longer-term demand outlook has weighed on prices, they could find short-term support from declining US crude stockpiles, which are expected to have fallen by about 3 million barrels last week. Both Brent and WTI were buoyed by a larger-than-expected drawdown from US crude inventories in the week ended Dec. 20 as refiners ramped up activity and the holiday season boosted fuel demand.
Investor Focus Shifts to Federal Reserve’s Rate Path
Investor focus next year will be on the Federal Reserve’s rate path after the central bank earlier this month projected just two rate cuts, down from four in September, due to stubbornly high inflation. Lower interest rates generally incentivize borrowing and fuel growth, which in turn is expected to boost oil demand.
Shifting Expectations Around US Rates Weigh on Other Currencies
The shifting expectations around US rates and the widening interest rate differentials between the US and other economies have lifted the dollar and weighed on other currencies. A stronger dollar makes purchases of oil more expensive for consumers outside the US, weighing on demand.
Markets Gearing Up for Trump’s Policies
Markets are also gearing up for President-elect Donald Trump’s policies around looser regulation, tax cuts, tariff hikes, and tighter immigration that are expected to be both pro-growth and inflationary – and ultimately dollar-positive. This could lead to higher oil prices in the long term as demand increases.
Conclusion
In conclusion, while oil prices rose on Tuesday due to China’s manufacturing activity expanding for a third straight month, concerns about demand continue to weigh on prices. The global oil market is expected to face challenges in 2025 due to a surplus of oil and lower demand from top consuming countries. However, declining US crude stockpiles and shifting expectations around US rates could provide short-term support to prices.
Outlook for 2025
The outlook for the global oil market in 2025 is uncertain. While OPEC and IEA cut their oil demand expectations, rising production from outside producers could lead to a surplus of oil in the market. Lower interest rates and looser regulation could boost demand, but concerns about inflation and a stronger dollar remain.
Recommendations
Investors should be cautious when investing in the global oil market due to the uncertain outlook for 2025. A diversified portfolio that includes different types of assets could provide stability in times of uncertainty.
Key Takeaways
- China’s manufacturing activity expanded for a third straight month, but at a slower pace.
- OPEC and IEA cut their oil demand expectations for 2025 due to concerns about a surplus of oil in the market.
- Declining US crude stockpiles could provide short-term support to prices.
- Shifting expectations around US rates and Trump’s policies could lead to higher oil prices in the long term.
Sources
Reuters, Bloomberg, CNBC
