When Strong Dollar and Market Pessimism Undercut Energy Rally

Price Action Signals Broader Economic Headwinds

Energy markets took a step backward on Friday as multiple headwinds converged. January WTI crude oil fell -0.16 (-0.28%) while January RBOB gasoline dropped -0.0077 (-0.44%), hitting a 4.75-year low for nearest-futures contracts. The decline reflects two major pressures: a strengthening US dollar that reduces crude’s appeal to international buyers, and weakening equities that signal deteriorating demand prospects for energy consumption.

The Global Surplus Problem Deepens

The fundamental equation underlying crude prices has shifted decidedly bearish. Trafigura, a major global commodities trader, warned Tuesday that 2026 will bring a “super glut” as new production floods markets while demand growth stalls. This supply overhang continues to undercut confidence in energy prices. The International Energy Agency projected a record 4.0 million barrel-per-day surplus for 2026, forcing OPEC+ to maintain production pause through Q1 2026 rather than executing planned increases.

Current market indicators reinforce the surplus thesis. Crude stored on stationary tankers (held 7+ days) fell -7.9 week-over-week to 121.23 million barrels by December 5. The crack spread—measuring refining margins—collapsed to a 2.25-month low, discouraging refineries from purchasing and processing crude into refined products.

Geopolitical Support Partially Offsets Weakness

Russian supply disruptions provide modest price support. Moscow’s oil product shipments fell to 1.7 million bpd in early November, the lowest in over 3 years, as Ukraine’s drone campaign has damaged 28+ refineries and key infrastructure. The Caspian Pipeline Consortium operating Kazakhstan’s 1.6 million bpd also faced forced closure after moorings damage.

Venezuelan sanctions add another dimension. US forces seized a sanctioned tanker Wednesday, with Reuters reporting additional interceptions planned. These seizures deter shipping companies from loading Venezuelan crude, effectively reducing exports from the world’s 12th largest producer. Russia’s position deteriorated further as Putin threatened retaliatory strikes against ships assisting Ukraine.

US Supply Dynamics Show Resilience

Domestically, crude production near record levels mitigates supply concerns. Output rose +0.3% week-over-week to 13.853 million bpd as of December 5, approaching November’s 13.862 million bpd peak. The EIA raised its 2025 production forecast to 13.59 million bpd. Active US oil rigs ticked up by 1 to 414 in the week ended December 12, though this remains well below the 627-rig peak from December 2022.

OPEC itself reduced output by -10,000 bpd to 29.09 million bpd in November. The organization shifted its Q3 assessment from deficit to a 500,000 bpd surplus as US production exceeded forecasts and OPEC ramped its own output.

Inventory Readings Suggest Balanced Market

Government inventory data shows mixed positioning. As of December 5, US crude inventories ran -4.3% below the 5-year seasonal average, while gasoline stood -1.8% below seasonal norms. Distillate inventories, however, showed deeper weakness at -7.7% below seasonal levels, indicating potential supply constraints in heating oil and diesel demand for the winter season.

The Outlook: Conflicting Signals

Energy prices face competing forces. Production growth, a stronger dollar, and recession fears undercut upside momentum. Simultaneously, geopolitical disruptions and OPEC+'s production discipline provide underlying support. Traders should monitor whether the supply surplus narrative overwhelms supply-side risks or if energy infrastructure damage sustains price floors going forward.