Written by: Rania Gule, Senior Market Analyst at XS.com
WTI crude oil prices fell to $72.40 on Thursday, reflecting growing volatility in global markets. In my view, crude oil is under significant pressure from the strength of the U.S. dollar, which makes oil more expensive for holders of other currencies, triggering a fresh wave of selling in the black gold. This impact was somewhat expected, especially given the current trend of central banks maintaining tight monetary policies to combat inflation.
The U.S. dollar’s strength as a safe-haven asset has become more apparent amid rising concerns over the global economy and inflationary pressures. I believe the dollar’s safe-haven appeal continues to grow under these conditions, adding further challenges for oil prices. However, potential support for crude prices could come from supply concerns, as any disruption in supply may limit sharp declines in prices.
One of the supportive factors for the oil market is the continuous decline in U.S. crude oil inventories. According to the U.S. Energy Information Administration (EIA), inventories fell by 959,000 barrels last week, exceeding market expectations of a 250,000-barrel decrease. Although the drop was smaller than the previous week’s decline, it still reflects strong demand for oil in the U.S. market and forms a key support for prices, especially as the winter season approaches, boosting heating demand.
Additionally, new sanctions on Iranian and Russian oil exports are expected to add more pressure to global supplies. The Biden administration plans to impose further restrictions on Russian oil exports, which could reshape global market flows and increase prices. These measures will add complexity for Asian buyers, who are increasingly turning to Middle Eastern oil to compensate for supply shortages.
At the same time, the physical oil market in the Middle East is showing signs of improvement. The recent OPEC+ decisions to extend supply cuts played a crucial role in reducing the projected surplus in the market for 2025. This strategic move by OPEC+ reflects the group’s desire to achieve long-term market stability. However, uncertainty surrounding Iranian oil supplies, especially after Trump assumes office, could add another layer of geopolitical risk.
In my opinion, the data indicates that the oil market ended 2024 on a strong note and started 2025 with promising momentum. Brent crude trading above $76 per barrel reflects growing investor confidence in sustained strong oil demand despite global economic challenges. This dynamic supports the idea that oil prices will likely continue to trade within a narrow range, with the possibility of further gains if supply constraints persist.
However, major economic factors, such as U.S. employment data and Federal Reserve statements, will remain key in determining the future direction of the markets. December’s U.S. employment data, expected on Friday, could strengthen the dollar further if it shows a strong labour market, adding near-term pressure on oil prices.
In conclusion, I believe the oil market is at a critical crossroads. On one hand, there are ongoing concerns about a global economic slowdown and the strength of the U.S. dollar. On the other hand, geopolitical risks and declining inventories provide strong support for prices. The future direction of crude oil will largely depend on the balance of these factors, making it essential for investors to closely monitor upcoming developments from OPEC+ and the Federal Reserve.