Energy Markets Pressured as Chinese Economic Signals Falter

The energy complex faced headwinds today with crude and refined products posting significant losses amid deteriorating demand expectations. January WTI crude fell -0.84 points (-1.46%) while RBOB gasoline retreated -0.0234 (-1.34%), with crude touching a 1.75-month floor and futures gasoline reaching 4.75-year lows. The selloff reflects a convergence of bearish factors spanning demand destruction, supply normalization, and reduced geopolitical premiums.

Demand Destruction Signals from Asia Drive the Selloff

Chinese economic data released today confirmed market fears about energy consumption trajectories. Industrial production unexpectedly decelerated to +4.8% year-over-year in November, undershooting both October’s +4.9% pace and consensus expectations of +5.0%. More concerning for refiners, retail sales expansion slowed to +1.3% year-over-year, missing the +2.9% forecast and marking the weakest print in 2.75 years. These chinese quotes capturing weakening activity painted a picture of softening end-demand for transportation fuels and industrial feedstocks.

Market sentiment deteriorated further when equities rolled over, with the S&P 500 declining to a 2-week low. The equity weakness signaled deteriorating confidence in near-term growth, a headwind for commodities correlated with economic activity like crude oil.

Geopolitical De-Risking Reduces Oil Premium

Ukrainian President Zelenskiy’s comments that US-Ukraine talks aimed at resolving the Russia conflict were “very constructive” sparked a reassessment of tail risks. Should negotiations bear fruit, potential lifting of Russian energy export sanctions would expand global supply and cap prices. This peace-optimism directly offset traditional geopolitical support for oil.

The crack spread—the profitability margin for refining crude into products—compressed to a 2.25-month low, signaling reduced incentives for refiners to purchase and process crude oil. Tanker data underscored this weakness: stationary crude storage aboard vessels reached 120.23 million barrels in the week ended December 12, up +5.1% week-over-week, suggesting crude being held in floating storage as refiners pulled back on intake.

Supply Dynamics: Mixed Signals Across Producers

Russian crude export capabilities remain crimped despite some market optimism about sanctions relief. Vortexa data showed Russian oil product shipments at just 1.7 million barrels per day during the first half of November—the lowest in over three years—following sustained Ukrainian attacks on 28 refineries over the preceding three months. Recent drone strikes disabled a Baltic Sea terminal and damaged the Caspian Pipeline Consortium, which normally carries 1.6 million bpd of Kazakhstani crude. New US and EU sanctions on Russian operators and tankers further constrained export flows.

Conversely, geopolitical risks surrounding Venezuela, the world’s 12th-largest producer, tightened supply. US forces intercepted and seized a sanctioned oil tanker off Venezuela’s coast last week, with Reuters reporting additional interceptions in preparation. Such enforcement actions discourage third-party shippers from loading Venezuelan cargoes, effectively restricting that nation’s export capacity.

OPEC+ Pauses, But Surplus Looms

OPEC+ reinforced its commitment on November 30 to pause production increases during Q1 2026 despite having lifted output +137,000 bpd for December. The organization remains mid-way through its restoration of the 2.2 million bpd cuts announced in early 2024, with 1.2 million bpd still pending recovery. November OPEC output fell -10,000 bpd to 29.09 million bpd.

However, the upstream picture suggests surplus dynamics are reasserting themselves. The IEA projected a record 4.0 million bpd global oil surplus for 2026. OPEC itself revised its Q3 outlook from deficit to surplus, now expecting a 500,000 bpd overage versus the prior month’s -400,000 bpd deficit call, attributed to unexpectedly robust US production and upticks in OPEC member output.

US Production Accelerates Toward Records

American crude production continues climbing, with output reaching 13.853 million bpd in the week ending December 5—a +0.3% weekly gain approaching the November 7 record of 13.862 million bpd. The EIA elevated its full-year 2025 forecast to 13.59 million bpd from the prior estimate of 13.53 million bpd. Active US drilling rigs rose +1 to 414 units for the week ending December 12, marginally above the 4-year floor of 407 rigs touched November 28, yet down sharply from the 5.5-year peak of 627 rigs recorded in December 2022.

US inventories offered mixed signals: crude stockpiles sat -4.3% below the seasonal 5-year average, while gasoline was -1.8% below and distillates posted -7.7% deficits, suggesting product demand remains relatively firm despite headline price weakness.

The convergence of weak demand signals, reduced geopolitical premiums, and emerging supply surpluses has shifted the crude market’s fundamental backdrop from support to headwind.