How Geopolitical Tensions and Dollar Momentum Undercut Crude Oil Rally

Energy markets faced persistent headwinds on Friday as January WTI crude fell -0.16 (-0.28%) and January RBOB gasoline declined -0.0077 (-0.44%), with gasoline touching a 4.75-year low for nearest-futures contracts.

The Multi-Pronged Pressure on Energy Prices

The weakness stems from three converging forces: currency strength has undercut commodity valuations, equity market losses dampened demand expectations, and growing concerns about global oil oversupply continue to weigh on sentiment. Trafigura’s Tuesday assessment warns of a “super glut” emerging next year as new production floods the market while energy consumption remains sluggish.

Technical deterioration added to bearish pressures. The crude crack spread—a key indicator of refining profitability—dropped to a 2.25-month low, discouraging refiners from purchasing crude and processing it into fuels. This suppresses demand for crude oil at the refining stage.

Geopolitical Support Offers Limited Relief

Despite broader downward pressure, certain geopolitical developments provided countervailing support. US interception of sanctioned Venezuelan tankers off the coast Wednesday, followed by Reuters reporting Thursday that more seizures are planned, threatens Venezuela’s already-constrained export capacity. As the world’s 12th-largest crude producer, any reduction from Venezuela typically supports prices.

Russian oil exports face mounting constraints from the Ukraine conflict. Putin’s Tuesday threat via Interfax to attack vessels assisting Ukraine, combined with five recent drone strikes on Russian tankers in the Black Sea, raises shipping risks. More significantly, Russia’s crude shipments plummeted to 1.7 million bpd in November’s first half—the lowest in over 3 years—as Ukraine’s drone and missile campaign has damaged at least 28 refineries, a Baltic Sea terminal, and forced the Caspian Pipeline Consortium (carrying 1.6 million bpd) to close. Additional US and EU sanctions further curtail Russian export channels.

Supply Dynamics and Inventory Management

OPEC+ provided modest support by confirming November 30 plans to pause production increases through Q1 2026, despite earlier authorization for a 137,000 bpd December increase. The cartel still must restore 1.2 million of the 2.2 million bpd it cut in early 2024, while the IEA forecasts a record 4.0 million bpd global surplus for 2026.

Production data reveals the supply challenge. OPEC November output slipped -10,000 bpd to 29.09 million bpd, and the organization revised Q3 estimates to show a 500,000 bpd surplus versus its prior -400,000 bpd deficit forecast. The EIA increased its 2025 US production estimate to 13.59 million bpd, and actual output hit 13.853 million bpd for the week ending December 5—approaching the November 7 record of 13.862 million bpd.

Supply flexibility appears limited. Baker Hughes reported Friday that active US oil rigs rose just +1 to 414 in the week ending December 12, still well below the 627-rig peak from December 2022. Floating crude storage declined -7.9 w/w to 121.23 million barrels as of December 5.

Inventory indicators suggest tightness at certain points. US crude inventories were -4.3% below the 5-year seasonal average, gasoline -1.8% below, and distillates -7.7% below as of December 5, offering some structural support despite macro headwinds.