Fed outlook sends oil prices lower amid demand concerns

Oil prices experienced a downturn on Thursday, as cautious signals from central bankers in the US, Europe, and Asia regarding monetary policy easing fueled anxieties about weakening economic activity and its potential impact on oil demand in the coming year.

This retreat underscores the sensitivity of the energy markets to global macroeconomic factors and central bank policies.

Brent crude futures fell by 62 cents, or 0.8%, settling at $72.77 a barrel by 2:12 p.m. EST (1912 GMT), while US West Texas Intermediate crude futures for January delivery dropped 70 cents, or 1%, to $69.88 per barrel.

The more actively traded February WTI contract also fell, down 75 cents, or 1.1%, to $69.27 a barrel.

These declines reflect investor unease following decisions by key central banks.

The US Federal Reserve, while cutting rates as expected on Wednesday, also signaled that stubborn inflation would lead them to be more cautious about rate cuts in 2025.

As Alex Hodes, an analyst at commodities brokerage StoneX, told Reuters, “A less accommodative Fed in 2025 than initially expected has markets adjusting their expectations.”

The US dollar's rise to a two-year high is also impacting oil prices, making the commodity more expensive for buyers holding other currencies.

This currency dynamic adds another layer of complexity to the oil market, limiting demand from key importers.

Meanwhile, the Bank of England held interest rates steady, with policymakers disagreeing on the proper response to a slowing economy.

In addition, the Bank of Japan maintained ultra-low interest rates, while US President-elect Donald Trump's proposed tariffs cast a shadow over the country's export-reliant economy.

Supply and demand imbalance

Softening economic activity next year may lead to a more pronounced slowdown in oil demand growth, and as a result Brent futures have shed more than 5% so far this year, setting up for a second consecutive annual loss, while the faltering Chinese economy is already weighing heavily on crude oil demand.

The situation is further compounded by the global energy transition, particularly in China, the world's largest oil importer.

State-backed energy giant Sinopec has projected that China’s petroleum consumption will peak in 2027 as fuel demand weakens.

This shift, combined with other factors, has led to the expectation that the oil market will be in a surplus next year, with JPMorgan analysts forecasting supply to outpace demand by 1.2 million barrels per day (bpd).

US crude stocks decline, but market remains bearish

Despite a draw in US crude stocks, which declined by 934,000 barrels in the week ending December 13, the oil market remained bearish.

This decrease was also smaller than the 1.6 million-barrel drawdown forecast by analysts in a Reuters poll, indicating that even positive data points are having limited impact on the overall downward price trend.