Prices had dipped after this week’s policy meeting of the US Federal Reserve, where the central bank forecast a slower pace of monetary easing in 2025. 

The two crude oil benchmarks, West Texas Intermediate on the New York Mercantile Exchange and Brent on the Intercontinental Exchange, have been trading in a narrow range over the last couple of months. 

Prices have struggled to break out of $68-$72 per barrel range for WTI, and $71-$75 a barrel for Brent. 

“Crude oil sold off in the aftermath of the Fed’s announcement and the release of its December Summary of Economic Projections,” Morrison added. 

But it was as much a reaction to general investor sentiment elsewhere, which was itself a kneejerk reaction to the Fed’s stating the obvious. In other words, nothing fundamental has changed.

OPEC+ output cuts provide a floor to prices

Though the Organization of the Petroleum Exporting Countries and allies have been adhering to steep voluntary production cuts, the reductions have not effectively boosted oil prices this year. 

Oil prices have struggled to sustain their gains from earlier this year and have since been trading in a narrow range. 

Eight members of the OPEC+ group, including Saudi Arabia and Russia, agreed to delay the unwinding of the 2.2 million barrels per day of voluntary output cuts from January 2025 till the end of March next year.

The voluntary output cuts had been extended multiple times over the last six months, which was originally set to expire in June. 

The extensions were part of a strategy to support oil and lift prices to around $80 per barrel. 

Source: FXempire

However, as global demand has largely been subdued this year, the output cuts have avoided further slide in oil prices. 

China’s demand for oil slipped this year, even with several economic stimulus from the government. The country is the biggest oil importer in the world. 

With demand struggling in China, without OPEC’s output cuts, the market would have been oversupplied. 

Even with OPEC’s production cuts next year, the International Energy Agency has forecast that supply is likely to outstrip demand by nearly 1 million barrels per day. 

Without the extension of the voluntary output cuts, the oversupply would have been significantly higher, according to the energy agency. 

Narrowing spread between WTI/Brent

The spread between WTI and Brent crude benchmarks has narrowed to about $3.50 a barrel from more than $4 a barrel in October. 

According to reports, the spread has narrowed as storage at Cushing, Oklahoma in the US, the delivery point for WTI, has dropped to 23 million barrels, its lowest level for mid-December in 17 years. 

According to Reuters, declining storage in Cushing meant that the US barrels were being priced to stay in the country.

US exports of crude oil had been higher last month as the spread between WTI/Brent widened to $4.50 per barrel at the end of November. 

This had encouraged more crude flows across the Atlantic Ocean to higher priced markets, thereby lifting US exports. 

No clear path for oil

Even as OPEC production cuts are extended and demand remains subdued, the market seems to be in a state of limbo. 

Moreover, the biggest driver for oil prices in all these years was China. 

Carsten Fritsch, commodity analyst at Commerzbank AG, said in a note:

 

In the coming years, oil demand in China is expected to be driven primarily by oil-based feedstocks in the petrochemical industry such as naphtha and LPG, demand for which is expected to increase by 55% by 2035.

“However, the days when China was the driver of global oil demand are likely to be over,” he added.

Therefore, the oil market would now look at other drivers for oil demand such as India and other emerging markets in Asia. 

According to OPEC’s estimates, India is likely to replace China as the biggest driver of crude oil demand growth in the coming years. 

However, in the short term, the oil market seems devoid of major catalysts to prop up prices from their current range. 

This could come in the form of further escalation in Middle East tensions or a flare-up of conflict between Russia and Ukraine. 

Additionally, Bloomberg reported on Thursday that the G7 countries have been planning to tighten the screw on Russian oil supply. 

Russia has circumvented the $60 per barrel cap imposed in 2022 using its “shadow fleet” of ships, which the EU and Britain have targeted with further sanctions in recent days. 

“For now, there’s nothing obvious on the horizon. But, of course, that’s the very nature of a market catalyst. You don’t see them until they arrive,” Morrison said.

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