Geopolitical Tensions and Supply Abundance Weigh on Oil Markets as Dollar Surges

Energy markets faced headwinds on Wednesday, with crude oil struggling under a confluence of bearish pressures. February WTI futures declined 0.53 points (-0.91%), while February RBOB gasoline retreated 0.0180 points (-1.04%), as traders digested a predominantly bearish weekly inventory report from the EIA alongside a strengthening dollar that reached a one-week peak on the DXY index.

Supply Abundance Pressures Crude Despite Geopolitical Support

The core narrative weighing on crude remains one of abundant supply. The IEA had forecasted a record global oil surplus of 4.0 million barrels per day for 2026, a stark reversal from earlier deficit expectations. This supply abundance is now materializing faster than anticipated. OPEC’s November output fell marginally by 10,000 bpd to 29.09 million bpd, though the organization continues rebuilding toward its production targets. OPEC+ confirmed in late November that it would pause further production increases through Q1 2026, a decision aimed at managing the emerging surplus.

US crude production remains robust, holding steady at 13.827 million bpd for the week ending December 26—just shy of November’s record of 13.862 million bpd. The EIA has since raised its 2025 US production forecast to 13.59 million bpd. Meanwhile, active US oil rigs increased by three to 412 in the week ended January 2, recovering from December’s 4.25-year trough of 406 rigs.

EIA Inventory Report Underscores Market Glut

Wednesday’s EIA data delivered predominantly negative signals. Gasoline inventories surged 5.8 million barrels to an 8.5-month high—significantly exceeding the 1.95 million barrel expectation. Distillate stockpiles rose 4.98 million barrels against a forecasted 1.55 million barrel build, while crude supplies at Cushing delivery hub increased 543,000 barrels. The lone bright spot came from an unexpected 1.93 million barrel crude inventory decline, countering expectations for a 500,000 barrel build.

Comparative to seasonal five-year averages as of December 26, US crude inventories sat 3.0% below normal, gasoline stocks were 1.9% above normal, and distillates were 3.7% below seasonal levels—a mixed picture reflecting the abundant supply dynamics at play.

Chinese Demand and OPEC+ Commitments Provide Limited Support

Offsetting some of these headwinds is robust Chinese crude demand. According to Kpler data, China’s imports this month are projected to increase 10% month-over-month to a record 12.2 million barrels per day as the nation rebuilds strategic reserves.

OPEC+ delegates signaled confidence that the cartel will maintain its production pause when meeting virtually on Sunday, providing modest price support. Geopolitical flashpoints—particularly escalating Ukrainian attacks on Russian infrastructure, US military actions against ISIS in Nigeria, and an intensifying US blockade of Venezuelan oil shipments—are also tempering downside pressure on crude.

Ukrainian drone and missile strikes have targeted at least 28 Russian refineries over four months, while six tankers have been struck in the Baltic Sea since November. The US Coast Guard intercepted the sanctioned tanker Bella 1 last week, forcing it away from Venezuelan waters and into the Atlantic. These supply-constraining developments have provided a floor under prices despite the abundance of crude globally.

Dollar Strength Compounds Energy Weakness

The dollar’s rally to a one-week high on the DXY index exacerbated crude’s decline, as a stronger dollar typically makes dollar-denominated commodities less attractive for foreign buyers. This technical headwind, combined with abundant supplies and mixed inventory dynamics, created an environment where early session strength in energy failed to hold ground through the close.