Crudes Face Headwinds as Demand Signals Weaken Amid Supply Optimism

January WTI crude oil futures declined 0.62 points (-1.08%) on Monday, while January RBOB gasoline contracts fell 0.0198 points (-1.13%). The commodity complex faced significant selling pressure, with crude retreating to its lowest level in 1.75 months and gasoline sliding to its cheapest nearest-contract price in 4.75 years. A confluence of bearish factors—particularly deteriorating energy consumption indicators from the world’s second-largest economy—overwhelmed supportive supply-side catalysts that had previously anchored oil values.

Demand Concerns Take Center Stage

Chinese economic data delivered the primary shock to market sentiment on Monday. Industrial production unexpectedly softened to +4.8% year-over-year in November versus +4.9% in October and consensus expectations of +5.0% expansion. More concerning, retail sales rose only +1.3% year-over-year, significantly undershooting the +2.9% forecast and marking the weakest pace since mid-2022. These figures amplified existing worries about global energy consumption dynamics as major economies face cyclical headwinds.

Equities mirrored the energy complex’s weakness, with the S&P 500 declining to a 2-week low on Monday. This equity selloff further dampened the economic outlook among portfolio managers, creating a negative feedback loop for risk assets including crude. Refiners facing margin compression provided additional downward pressure—the crude-to-products crack spread fell to a 2.25-month low Monday, eroding incentives to process crude into refined products. Vortexa data confirmed this dynamic, showing tankers holding crude stationary for at least 7 days rose 5.1% week-over-week to 120.23 million barrels in the week ended December 12.

Geopolitical Recalibration Pressures Prices

Diplomatic developments in Eastern Europe added another layer of selling. Ukrainian President Zelenskiy stated Monday that negotiations between Washington and Kyiv regarding conflict resolution were “very constructive,” sparking speculation that potential Russian-Ukrainian ceasefire discussions could materialize. If geopolitical tensions ease, markets fear that current sanctions constraining Russian energy exports could face pressure to unwind, flooding markets with additional crude supply.

However, acute supply disruptions elsewhere partially offset these headwinds. Ramped-up enforcement actions in Venezuelan waters—where US forces intercepted and seized a sanctioned oil tanker last Wednesday—raised risks to Latin American export flows. Reuters reported Thursday that additional sanctioned tanker seizures are being prepared, likely deterring third-party shippers from accepting Venezuelan cargoes and effectively reducing export capacity from the world’s 12th-largest crude producer.

Supply Constraints Provide Price Support

Russian crude export limitations continued providing foundational support to the crude complex. Vortexa data showed Russia’s oil product shipments fell to 1.7 million barrels per day in the first half of November—the lowest in over 3 years—as Ukrainian drone and missile campaigns targeted infrastructure. Recent strikes damaged a Russian Baltic Sea oil terminal, forcing temporary closure. The Caspian Pipeline Consortium, which evacuates 1.6 million bpd of Kazakhstan’s exports, was similarly forced offline after moorings damage required closure.

Sanctions escalation reinforced these constraints. New US and EU designations targeting Russian oil companies, infrastructure, and tanker vessels have materially curtailed Russian export capacity, offsetting OPEC+ member production decisions.

OPEC+ Maintains Cautious Posture

On November 30, OPEC+ reaffirmed its decision to pause production increases throughout Q1 2026, acknowledging an emerging global surplus environment. The cartel had previously announced December 2025 production raises of +137,000 bpd, followed by a production plateau in early 2026. OPEC remains in the midst of a multi-year restoration program, targeting a +2.2 million bpd total recovery from 2024 cuts, but approximately 1.2 million bpd remains unrestored.

OPEC crude output fell by 10,000 bpd to 29.09 million bpd in November. The organization recently revised its Q3 oil market assessment from deficit to surplus, estimating a +500,000 bpd global surplus as US production outpaced expectations and OPEC ramped output. The IEA forecasted a record global oil surplus of 4.0 million bpd for 2026.

US Production Metrics and Inventory Dynamics

The EIA raised its 2025 US crude production forecast to 13.59 million bpd from 13.53 million bpd previously. Last Wednesday’s EIA weekly report disclosed that US crude inventories as of December 5 were 4.3% below the 5-year seasonal average, gasoline stocks were 1.8% below the seasonal baseline, and distillate inventories sat 7.7% below seasonal norms. US crude production for the week ending December 5 advanced 0.3% week-over-week to 13.853 million bpd, approaching the November 7 record of 13.862 million bpd.

US oil rig counts reflected cautious market sentiment. Baker Hughes reported that active US oil rigs increased by 1 to 414 units in the week ending December 12, remaining modestly above the 4-year nadir of 407 rigs set November 28. The trajectory has shifted markedly from the 5.5-year high of 627 rigs in December 2022, indicating prolonged industry capital restraint over the past 30 months.