Stability for Crude Oil

2024 will likely be remembered as a rare year of calm for WTI crude oil. Prices remained within a $21 trading range, making it the third narrowest band since 2007. Nearly 80% of trading days saw prices below $80. A statistic that reflects how consistently subdued the market was, even amidst a backdrop of geopolitical tension and economic challenges.

While the market lacked the sharp volatility that often defines crude oil trading, it offered valuable data in managing global supply and demand. Understanding why the market remained so constrained provides a clearer picture of what may lie ahead.

The Role of China

Early in the year, many analysts anticipated stronger economic growth following the easing of COVID-19 restrictions. Instead, the country’s industrial output and consumer spending fell short of expectations.

As the world’s second-largest oil consumer, the country’s demand is often a bellwether for crude prices. In 2024, China’s economy expanded by 4.8% year-on-year in the first three quarters, slightly below the government’s target of around 5%. This growth was challenged by subdued domestic demand and a prolonged downturn in the property sector.

To counter these challenges, the Chinese government implemented a series of stimulus measures aimed at revitalizing the economy. In September 2024, the People’s Bank of China (PBoC) reduced the reserve requirement ratio for banks, injecting liquidity into the financial system to encourage lending and investment.

According to Reuters, the government has agreed to 3 trillion yuan in special sovereign bonds to fund infrastructure projects and support economic growth for 2025 which would be the highest on record. For more details check out this article. REUTERS

These measures have begun to take effect, with improvements observed in various economic indicators. However, challenges remain, and the government has signaled that support for the economy will continue into 2025.

Despite these economic headwinds, China’s crude oil imports ended the year strong. In November 2024, imports were approximately 11.31 million barrels per day (b/d).

This surge is attributed to several factors:

• Lower Crude Prices: The decline in global oil prices during this period made imports more economically attractive, prompting Chinese refiners to increase their purchases.
• Strategic Stockpiling: China took advantage of the lower prices to bolster its strategic petroleum reserves, enhancing energy security.
• Increased Refinery Activity: The ramp-up of operations at new mega-refineries, such as the Shandong Yulong Petrochemical facility, contributed to the heightened demand for crude imports.

The China National Petroleum Corporation (CNPC) anticipates that the country’s oil consumption peaked in 2023 at 7.98 million b/d and is expected to decline by 1.3% in 2024. This projected decrease is largely due to the increasing adoption of electric vehicles and an emphasis on alternative energy sources.

OPEC+ Efforts to Stabilize the Oil Market

OPEC+ nations, including Saudi Arabia, Russia, Iraq, and others, have continued their efforts to maintain balance in the oil market through extended voluntary production cuts. At the 38th OPEC and non-OPEC Ministerial Meeting (ONOMM), held virtually in December 2024, member countries reaffirmed their commitment to production adjustments introduced in April 2023 and November 2023. These cuts, totaling 3.85 million barrels per day (b/d), aim to prevent market oversupply and stabilize prices during falling demand.

Under this agreement, 2.2 million b/d of the cuts will remain in effect through March 2025 before being gradually phased out by September 2026, subject to market conditions. Member countries also pledged leniency, allowing for adjustments to production increases if market conditions require. The goal is to provide transparency and consistency, which are great for headlines, but members continue to breach their quotas.

Overproduction and Compensation Plans

Despite OPEC+’s unified stance on voluntary cuts, the organization faces challenges in ensuring compliance. Countries such as Iraq and Russia have exceeded their production quotas, contributing to market imbalances and raising concerns about enforcement within the group. To address this, OPEC+ has implemented compensation plans, requiring overproducing members to align with their commitments by mid-2026.

This highlights the broader issue: for many OPEC+ nations, oil exports are the lifeblood of their economies. While voluntary cuts buoy prices in the short term, overproduction remains an attractive option for countries that are heavily reliant on oil revenue. The penalties for breaching quotas may act as a deterrent for now, but the calculus will change if economic pressures intensify.

China’s Role in Shaping OPEC+ Strategy

For OPEC+, China remains a key factor in demand forecasting and production decisions. The rebound in Chinese imports provided critical support for global oil demand in late 2024, offsetting weaker consumption in other regions. However, with China’s oil consumption projected to decline slightly in 2025 due to the growing adoption of electric vehicles and alternative energies, OPEC+ will need to exercise caution. A miscalculation in production adjustments could lead to a supply glut.

The production cuts and compensation mechanisms introduced by OPEC+ reflect an effort to anticipate future needs with proactive measures. So far, there is some agreement they have succeeded in stabilizing prices, but the sustainability of this strategy depends on several factors:

1. Member Compliance: Ensuring adherence to production quotas is critical, as overproduction risks undermining the collective effort to manage supply.
2. Economic Pressures: For countries heavily dependent on oil exports, the penalties for overproduction may eventually prove less compelling than the need for revenue, challenging the cohesion of OPEC+.
3. Demand Uncertainty: China’s energy goals, along with global efforts to transition to alternative energy sources, will continue to influence demand.

The stability achieved thus far is not guaranteed, particularly in a market dependent of political and economic policy.

The Dollar’s Influence

The U.S. Dollar Index (DXY) remained strong in 2024 despite the Federal Reserve initiating its first rate cuts since the COVID-19 pandemic. This directly impacted crude oil, as it is priced in dollars.

A stronger dollar increases the cost of crude oil for buyers using other currencies, often reducing global demand. This creates a downward pressure on prices, independent of supply levels. In 2024, the dollar’s stability, supported by relative economic strength in the U.S. limited the effect of rate cuts on crude oil.

For oil-exporting countries, the stronger dollar reduces the value of revenues in local currencies, while for U.S. buyers, it improves purchasing power. This influences demand patterns, with higher costs for some markets restricting consumption and altering trade flows.

The dollar remains a key factor in determining crude oil pricing and demand globally.

Tight Rig Count

The U.S. rig count for crude oil has settled into an unprecedented period of calm, a contrast to the cycles of expansion and contraction that defined previous decades. It’s a reflection of how the industry has changed, embracing efficiency and profits over the relentless pursuit of growth.

Historically, when crude prices surged, rigs would spring into action, and when prices dropped, so would the count. It was predictable, driven by short-term gains. But today, producers seem to be taking a longer view. The rig count’s steadiness is one where financial restraint, operational efficiency, shareholder profitis and producing more with less are the focus.

This flat trajectory also tells a story about technology. Advancements in drilling techniques have allowed operators to increase production levels to new heights while deploying fewer rigs. Combine that with the industry’s heightened focus on shareholder returns and the external pressures of ESG considerations, and you see why this change makes sense.

What does this mean for the market? So far, stability. A flat rig count has given a more predictable supply, which, in turn, can temper some of the volatility we’ve come to expect. But it also raises an important question: With Donald Trump retaking office in two weeks, will the industry rush to add rigs knowing each one will add to the supply and effectively lower WTI prices?

Probably.

For now, the rig count reflects efficiency and sustainability over the boom-and-bust cycles of the past.

One factor to monitor with rising U.S. production is how much oil will be directed to the Strategic Petroleum Reserve (SPR). The SPR, which has been tapped multiple times to ease pump prices, dropped to its lowest level since 1983, below 350 million barrels. While stockpiles have increased modestly since the end of 2023, levels remain under 400 million barrels. For context, the SPR had not fallen below 500 million barrels since 1986. If there is a commitment to replenishing the SPR, additional production could find a destination before oversupply pressures begin to weigh on prices.

Looking Forward: Lessons and Expectations

One could anticipate a volatile start to the year as the new administration takes over and we see what policy changes look like. History tells us that we are unlikely to trade in such a tight range as we did in 2024, but I am not so sure. Key factors from last year remain the same, China’s economic performance, OPEC+ strategies, and the energy transition will continue to influence crude oil markets.

If China’s economic recovery efforts are successful in 2025 and industrial output and consumer demand increase the demand would seemingly be met with open arms from OPEC members.

Trump’s campaign commitment to establishing an end to the wars in Ukraine and Israel would remove volatility around those headlines. Increased tariffs could have an impact if implemented however, it is important to note that President Trump has a record of being a great negotiator. Fair trade is essential for every country, and they know it.

The global energy transition, including efforts in the United States, will persist regardless of the incoming administration. Europe, China, and other leading nations remain firmly dedicated to cutting carbon emissions. Investments in cleaner energy and improved efficiency will advance, often leveraging the economic benefits of lower oil prices to finance these initiatives.

Trump’s policies could introduce friction with OPEC. Efforts to flood the market with U.S. crude could undermine OPEC+ strategies to manage supply and stabilize prices. This could result in more aggressive production cuts from OPEC, potentially leading to a tug-of-war over market share. The balance of power between U.S. shale and OPEC would play a critical role in determining price movements.

The possibility of reinforced sanctions by the incoming administration on Iran looms as a key risk to the global oil market. Any significant restrictions would remove Iranian barrels from circulation, tightening supply at a time when the market is attempting to manage production. The U.S. and Saudi Arabia could fill the gap, but how quickly they can scale up production remains uncertain. Spare capacity exists, but logistical challenges and political considerations could delay a response. For traders and policymakers alike, the timeline for these adjustments will be crucial to watch, as it could drive short-term price volatility and test the cohesion of OPEC+ agreements. We wrote about the impacts on sanctions last January.

A reemphasis on U.S. energy independence may widen the price gap between WTI and Brent crude. With increased domestic supply from shale producers, WTI might trade at a steeper discount to Brent, which is more sensitive to global geopolitical risks and European demand.

If the U.S. floods the market, WTI prices could remain subdued while Brent reflects tighter supply in regions outside North America.

Good luck and happy trading in 2025!