Oil Sinks as Oversupply Pressures Intensify

West Texas Intermediate oil fell below $55 a barrel for the first time since February 2021 on signs that supply is outpacing demand, while progress in Ukraine peace talks could lead to a deal that may allow more Russian oil to flow onto global markets.

US crude futures pared some losses, settling down 2.7% to $55.27. Brent, the global benchmark, fell 2.7% to settle at $58.92.

Signs of weakness are proliferating across the supply side of the oil market, with Middle Eastern crude prices entering a bearish pattern known as contango early on Tuesday. The same already had happened with some barrels sold on the US Gulf Coast, with near-dated prices cheaper than contracts for delivery further out. On the WTI futures curve, the front-month contract was trading as little as 9 cents higher than the following month.

The demand side looks similarly fragile. Elevated premiums for fuels like gasoline and diesel relative to crude, which supported prices last month, have eased. Meanwhile, weak job growth in the US signaled a potential slowdown in demand, adding further downward price pressure.

While markets have been in a period of oversupply, a steady stream of geopolitical risks, and the fact that significant oil supply has gone to stockpiles at sea or in China, has kept markets tight, said Rory Johnston, oil market researcher and founder of Commodity Context.

“The market has been trending this way,” Johnston said. “It’s been wanting to sell off, flip into contango for six months now, but it just keeps being delayed from doing so.”

Trend-following commodity advisers remained 100% short in both Brent and WTI on Tuesday, according to data from Bridgeton Research Group. Widespread short positioning means that bullish news could push markets higher as automated traders cover positions, Johnston said.

“My base case expectation is that we will bounce again, probably pretty aggressively, as we get some kind of other geopolitical headline,” Johnston said. “But inevitably the weight of these lopsided fundamentals, the supply surplus, will continue to drive prices lower until the market balances.”

Oil is on track for a yearly loss, with supply set to exceed demand both this year and next thanks to growth in production from the Organization of the Petroleum Exporting Countries and a host of non-member nations in the Americas. The International Energy Agency estimates that the surplus next year will be the largest on record.

“All eyes today are looking for whether Brent will close below $60 or not,” said Bjarne Schieldrop, chief commodities analyst at SEB AB. “But for sure we are heading lower until the point when OPEC+ pivots from ‘hold’ to ‘cut’.”

The decline will bring some relief to central bankers looking to cut interest rates next year by offering a reprieve from inflationary pressure. US retail gasoline prices fell to the lowest level since 2021 earlier this month.

However, it also threatens the budgets of oil-producing nations and companies alike, since many OPEC members need prices far above current levels to balance their budgets.

What Bloomberg Strategists Say

“Any recovery will likely depend on a stronger demand picture or clearer supply restraint. Yet the selloff has gathered pace this month as evidence builds that supply is running ahead of demand.”

—Nour Al Ali, Markets Live strategist.

The drop in recent days has been compounded by the prospect of an end to the conflict in Ukraine. President Volodymyr Zelenskiy said he has an agreement with the US to make security guarantees legally binding through a vote in Congress as part of a deal to end Russia’s war.

His team held a second day of discussions in Berlin, with talks lasting about five hours and including US special envoy Steve Witkoff and Jared Kushner, President Donald Trump’s son-in-law.

Still, it’s unclear whether the new US effort will be enough to overcome the hurdles that have derailed previous talks. Russian leader Vladimir Putin hasn’t budged from his demands about seizing vast swaths of territory.

Oil Prices

WTI for January delivery fell 2.7% to settle at $55.27 a barrel in New York.
Brent for February settlement dipped 2.7% to settle at $58.92.