• Oil prices are falling due to oversupply concerns and a stronger dollar, despite a significant draw in U.S. fuel stocks.
• The International Energy Agency forecasts that global oil supply will exceed demand by 2025, due to rising production and sluggish demand.
• The surge of the dollar to a one-year high is adding to the pressure on oil prices, making dollar-denominated oil more expensive for holders of other currencies.
• The global oil market is facing a potential glut next year, with the transition to electric vehicles and other factors undermining Chinese oil demand growth.

Oil prices have taken a downward turn, with oversupply concerns and a stronger dollar overshadowing a significant draw in U.S. fuel stocks. Brent crude futures were down by 30 cents, or 0.41%, at $72.26 a barrel, while U.S. West Texas Intermediate crude futures fell by 25 cents, or 0.36%, to $68.45. This trend is expected to continue, with Brent set to fall about 2.2% and WTI to decline 2.7% over the week.

The U.S. crude inventories rose by 2.1 million barrels last week, a figure much higher than analysts' expectations of a 750,000-barrel rise, according to the Energy Information Administration (EIA). This increase in crude inventories is reminiscent of similar events in the past where unexpected inventory surges have led to a drop in oil prices.

In contrast, gasoline stocks fell by 4.4 million barrels to their lowest since November 2022, a decrease that was not anticipated by analysts who had predicted a 600,000-barrel build. Distillate stockpiles, which include diesel and heating oil, also fell unexpectedly by 1.4 million barrels.

Global Oil Supply to Exceed Demand by 2025

Despite these signs of stronger demand, oil prices have come under pressure due to a bleak outlook for demand. The International Energy Agency (IEA) has forecast that global oil supply will exceed demand in 2025, even if cuts remain in place from OPEC+, which includes the Organization of the Petroleum Exporting Countries and allies such as Russia. This is due to rising production from the U.S. and other outside producers outpacing sluggish demand.

The Paris-based agency has raised its 2024 demand growth forecast by 60,000 barrels per day to 920,000 bpd, and left its 2025 oil demand growth forecast little changed at 990,000 bpd. However, OPEC has cut its forecast for global oil demand growth for this year and 2025, highlighting weakness in China, India, and other regions. This marks the producer group's fourth consecutive downward revision to its 2024 outlook.

Adding to the pressure on oil prices is the surge of the dollar to a one-year high, fueled by higher yields and Donald Trump's presidential election victory in the United States. A stronger greenback makes dollar-denominated oil more expensive for holders of other currencies, which can reduce demand.

Market Factors and Future Implications

The premium of the front month WTI contract over the second month contract also narrowed this week to its smallest since June, indicating that a perception of tight supply for prompt delivery has eased. A rally in U.S. 10-year Treasury yields and a surge in the 10-year break-even inflation rate to 2.35% added to demand worries.

The global oil market is facing a potential glut next year, according to the IEA. This is not just due to economic factors and a slowdown in the construction sector, but also due to the transition to electric vehicles, high-speed rail, and gas in trucking that is undermining Chinese oil demand growth.

The risk of lower oil revenue is of concern for Saudi Arabia's budget and broader public sector spending program. A modest and short-lived drop in oil revenue could comfortably be managed given the strong government balance sheet.

However, a longer period of much lower oil revenue would force some more difficult decisions to be made about spending priorities and whether new sources of non-oil revenue need to be tapped to finance the kingdom's ambitious spending plans.