Global Oil Supply Pressure Mounts as Dollar Rally Caps Crude Gains

The crude oil market faced headwinds on Tuesday as the strengthening US dollar index climbed to a 1-week peak, offsetting support from geopolitical tensions and production concerns. February WTI crude settled lower, declining 0.13 points (-0.22%), while February RBOB gasoline edged up 0.31%, reflecting mixed sentiment across energy commodities.

Supply Pressures Mount Amid Conflicting Forces

The underlying oil pressure remains low due to a building global crude surplus that’s challenging price support. Monday’s EIA weekly inventory release delivered bearish signals for the crude complex. US crude stockpiles unexpectedly climbed by 405,000 barrels, contradicting market expectations for a 2.0 million barrel drawdown. This inventory build at Cushing, the critical WTI delivery hub, surged 707,000 barrels—adding to downward price momentum. Gasoline inventories similarly increased by 2.86 million barrels, outpacing expectations of 1.1 million barrels.

However, tailwinds emerged from the International Energy Agency’s alarming forecast of a record 4.0 million barrel-per-day global surplus throughout 2026, signaling extended pressure on valuations. OPEC revised its Q3 projections from a deficit to a 500,000 bpd surplus after US production exceeded targets.

Geopolitical Support and OPEC+ Commitment Provide Floor

Despite the bearish inventory backdrop, losses remained capped by persistent supply risks spanning multiple regions. Ukrainian drone and missile strikes have targeted at least 28 Russian refineries over four months, significantly constraining Moscow’s export capabilities. Since late November, Ukraine has intensified attacks on Russian tankers, hitting at least six vessels in the Baltic Sea. Fresh US and EU sanctions on Russian oil infrastructure have further restricted exports from the world’s second-largest producer.

Venezuelan supply disruption intensified as the US Coast Guard intercepted the sanctioned oil tanker Bella 1, forcing it to abandon its approach to Venezuela. US naval forces continue shadowing the vessel, enforcing President Trump’s blockade on sanctioned shipments. Vortexa data shows crude stored on stationary tankers increased 15% week-on-week to 129.33 million barrels in the week ending December 26, reflecting logistics bottlenecks.

Nigeria, an OPEC member, faces renewed security challenges after the US launched military strikes against ISIS targets, reducing production reliability in an already tight supply chain.

China’s Demand Recovery and OPEC+ Production Pause

Chinese crude demand provided crucial support, with imports set to jump 10% month-on-month to a record 12.2 million barrels per day as Beijing rebuilds strategic reserves. This demand surge offers a counterweight to the global surplus narrative.

OPEC+ delegates signaled the cartel will maintain its production pause commitment during Sunday’s monthly video conference, declining to implement further supply increases in Q1 2026. The organization previously announced a +137,000 bpd production hike for December before freezing expansion plans. OPEC’s November crude output declined 10,000 bpd to 29.09 million bpd, reflecting the organization’s cautious stance. The group continues attempting to restore the 2.2 million bpd production cut from early 2024, with 1.2 million bpd still pending restoration.

US Production Reaches Near-Record Levels

American crude output in the week ending December 19 dropped marginally 0.1% week-on-week to 13.825 million bpd, remaining just below the November 7 record of 13.862 million bpd. The EIA raised its full-year 2025 US production forecast to 13.59 million bpd from the previous 13.53 million bpd estimate. Active US oil rigs climbed 3 units to 412 in the week ended January 2, bouncing from the 4.25-year low of 406 rigs recorded December 19, though rig counts remain sharply below the December 2022 peak of 627 rigs.

Inventory Dynamics Paint Mixed Picture

Current US crude stockpiles sit 3.3% below the seasonal 5-year average, while gasoline supplies stand 0.7% above seasonal norms and distillate inventories remain 5.1% below the seasonal benchmark. EIA distillate inventory builds came in smaller than anticipated at 202,000 barrels versus expectations of 1.0 million barrels—the sole bright spot in an otherwise bearish report.

The dollar’s strengthening remains a key headwind for crude demand globally, as higher dollar valuations increase crude costs for overseas buyers, creating additional oil pressure on already-soft global demand momentum.