Peace Hopes Wipe Out Crude's Weekly Gains as Supply Pressures Mount

January WTI crude oil futures fell -0.10 (-0.17%) on Friday, while January RBOB gasoline declined -0.0058 (-0.32%), erasing earlier momentum built from geopolitical tensions. The retreat stems from optimism surrounding potential Russian-Ukrainian peace negotiations, which could significantly reshape the global energy landscape.

Geopolitical Shifts Pressure Energy Markets

Crude prices came under immediate pressure Friday following signals of potential diplomatic breakthroughs. Russian President Putin indicated that proposals from the Trump administration could form a foundation for future peace agreements, with US envoy Witkoff expected to visit Russia in the coming week. Such developments have spooked traders betting on prolonged supply constraints.

However, the supply picture remains complex. Ukraine’s military operations have systematically erased significant portions of Russian refining infrastructure. Over the past three months, Ukraine targeted at least 28 Russian refineries, effectively wiping out 13% to 20% of Russia’s total refining capacity by late October—reducing output by as much as 1.1 million barrels per day. This aggressive campaign has curtailed Russia’s crude export capabilities and exacerbated fuel shortages domestically.

Recent Vortexa data underscores the impact: Russia’s oil product shipments fell to 1.7 million bpd in November’s first 15 days, marking a 3-year low. New US and EU sanctions targeting Russian oil firms, infrastructure, and tanker fleets have further constrained exports.

Dollar Weakness Initially Supported Crude

Friday’s price action began differently. After the US dollar index tumbled to a 1.5-week low, crude oil initially advanced. This technical support combined with carryover strength from Wednesday’s Baker Hughes report, which showed active US oil rigs plummeting to a 4-year low of 407—suggesting near-term production headwinds for American producers.

OPEC+ Navigates Global Surplus

The supply narrative has shifted dramatically. OPEC+ will convene virtually this Sunday amid expectations it will maintain its pause on production increases through early 2026. Market consensus suggests the group will hold course given emerging global oversupply conditions.

October crude production from OPEC members rose +50,000 bpd to 29.07 million bpd—the highest in 2.5 years. Yet OPEC revised its quarterly outlook, flipping Q3 global markets from a projected 400,000 bpd deficit to a 500,000 bpd surplus, as US output exceeded forecasts. The IEA projects an even more dramatic surplus of 4.0 million bpd in 2026.

US Production Dynamics Weaken

American oil production slipped in the latest week, declining -0.1% week-over-week to 13.814 million bpd for the week ending November 21, retreating from November 7’s record high of 13.862 million bpd. The sharp contraction in active rig counts—down from December 2022’s 5.5-year peak of 627 rigs to current levels—signals drilling activity will likely remain subdued in the near term.

Inventory Levels Fall Below Historical Norms

Current storage conditions suggest underlying tightness. As of November 21, US crude inventories sat -3.8% below the 5-year seasonal average, while gasoline reserves were -3.3% below normal levels and distillates registered -6.9% below seasonal benchmarks. Meanwhile, crude stored on tankers stationary for at least 7 days climbed +9.7% week-over-week to 114.31 million barrels in the week ended November 21—the highest in 2.25 years, indicating market uncertainty.

OPEC+ has been attempting to restore the 2.2 million bpd production cuts implemented in early 2024, with only 1.2 million bpd remaining to be reinstated. The recent +137,000 bpd December increase will be followed by the planned production pause, reflecting the group’s cautious stance toward a potentially oversupplied market.