Oil prices experienced a sharp decline on Friday, December 20, 2024, as concerns over future demand growth and a strong US dollar drove down global crude benchmarks. This decline comes as global markets anticipate a potential reduction in China’s oil imports and rising production levels from non-OPEC countries.
Current Market Prices
- Brent Crude Futures: Fell by $0.31 or 0.43% to $72.57 per barrel.
- West Texas Intermediate (WTI) Crude: Dropped by $0.26 or 0.26% to $69.12 per barrel.
These price reductions mark a potential weekly loss of more than 2% for global oil benchmarks.
Key Factors Behind the Decline
1. China’s Reduced Oil Demand
The market was hit by forecasts from Sinopec, China’s largest state-owned refiner. In its latest annual energy outlook, Sinopec predicted that:
- China’s oil imports could peak as early as 2025.
- China’s total oil consumption could peak by 2027, driven by the decline in diesel and gasoline demand.
China is the world’s top crude importer, and a potential slowdown in its oil demand directly impacts global market prices. The reduction in Chinese imports would signal weaker global demand for crude oil, leading to downward pressure on prices.
2. Strengthening of the US Dollar
The US dollar surged to a two-year high, further impacting oil prices. The strength of the dollar is crucial because oil is traded in USD globally. As the dollar strengthens, oil becomes more expensive for holders of other currencies, reducing demand.
- The rise in the dollar follows signals from the US Federal Reserve that it would remain cautious on interest rate cuts in 2025.
- This decision is expected to slow economic growth, thereby reducing energy demand.
The relationship between the US dollar and oil prices is well-established. A stronger dollar typically leads to a drop in oil prices, as global buyers face higher costs when purchasing crude.
3. Increased Supply Forecasts
J.P. Morgan has forecasted a shift in the oil market from balance in 2024 to a surplus of 1.2 million barrels per day (bpd) in 2025. This prediction is driven by:
- Non-OPEC+ production growth of 1.8 million bpd.
- OPEC production levels expected to remain constant.
This expected increase in supply could further weaken oil prices. The prospect of surplus oil on the market, coupled with declining demand from China, has created bearish sentiment in the oil market.
Impact of G7 Sanctions on Russian Oil
The G7 nations are considering stricter measures to control the price of Russian oil. Possible steps include:
- Outright bans on the purchase of Russian oil.
- Lowering the existing price cap on Russian crude, currently set at $60 per barrel.
Russia has been able to bypass previous restrictions using a shadow fleet of ships to transport oil globally. The European Union (EU) and UK have taken additional steps to disrupt this network, imposing new sanctions on ships involved in the illegal trade of Russian oil.
What Lies Ahead?
The combination of reduced demand from China, a strong US dollar, and a forecasted oil surplus in 2025 is expected to keep downward pressure on oil prices. Traders and analysts will be watching for updates from the Federal Reserve, as well as signs of changes in Chinese oil imports and any new actions by the G7 and EU against Russian oil exports.
As 2025 approaches, the oil market faces a period of uncertainty. The interplay of demand forecasts, currency fluctuations, and global production levels will be key to understanding the direction of oil prices in the coming months.
