Multiple Headwinds Push Crude and Gasoline to Multi-Year Lows

Crude oil faced significant selling pressure on Monday, with January WTI closing down 1.08% and RBOB gasoline dropping 1.13%. The broader market weakness was evident as crude hit a 1.75-month bottom while gasoline reached its lowest level in nearly five years. This sharp decline reflects a confluence of bearish factors that have shifted market sentiment in recent sessions.

Demand Concerns Drive the Selloff

The primary culprit behind Monday’s weakness stems from softening economic signals out of China. Industrial production growth decelerated to 4.8% year-over-year in November, undershooting expectations of 5.0% and marking a slowdown from October’s 4.9% pace. Retail sales painted an even grimmer picture, rising just 1.3% year-over-year—well below the anticipated 2.9% and representing the weakest expansion in nearly three years.

These indicators suggest cooling energy consumption in the world’s second-largest economy, a major concern for crude markets. Adding to the demand narrative, equity markets also retreated on Monday with the S&P 500 hitting a two-week low, signaling investor caution about the broader economic trajectory. When recession fears creep in, energy demand typically contracts alongside.

Geopolitical Relief Weighs on Prices

Peace negotiations between the US and Ukraine offer another explanation for crude’s decline. Ukrainian President Zelenskiy characterized Monday’s talks as “very constructive,” raising the prospect of a near-term ceasefire. While geopolitical stability is generally positive for society, it spells trouble for oil prices. A Russian-Ukrainian settlement could pave the way for sanctions relief on Russian energy exports, potentially flooding markets with additional crude supply.

The crack spread—the profit margin for refiners converting crude into gasoline and distillates—also compressed to a 2.25-month low, discouraging refiners from aggressively purchasing crude. Meanwhile, floating storage inventories climbed 5.1% week-over-week to 120.23 million barrels as of mid-December, suggesting ample supply and weak refining demand.

Supply Disruptions Provide Limited Support

Despite the bearish backdrop, some factors continue to underpin prices. Geopolitical tensions in Venezuela remain elevated following US interception of sanctioned oil tankers last week. With the US reportedly preparing additional seizures, Venezuelan crude exports face logistical challenges as shipping companies grow more cautious about loading Venezuelan cargoes.

Russia’s crude export capabilities have also tightened. Vortexa data from mid-November showed Russian oil product shipments at just 1.7 million barrels per day—the lowest level in over three years. Ukrainian drone strikes targeting 28 Russian refineries over recent months have strained the nation’s fuel production and export infrastructure. Recent attacks on a Baltic Sea terminal and damage to the Caspian Pipeline Consortium (which moves 1.6 million bpd of Kazakhstani crude) have further constrained supply flows.

New sanctions from the US and EU targeting Russian energy infrastructure and tanker fleets continue to restrict export volumes, though these measures have proven insufficient to overcome demand weakness.

OPEC+ Maintains Conservative Stance

OPEC+ reaffirmed its decision on November 30 to pause production increases throughout the first quarter of 2026, providing modest price support. The cartel had previously announced a 137,000 bpd production rise for December before the pause takes effect. However, this cautious approach reflects an industry-wide acknowledgment of emerging oversupply conditions.

The International Energy Agency forecasted a record 4.0 million barrel-per-day global surplus for 2026. OPEC itself acknowledged shifting market dynamics, revising its third-quarter estimates from a deficit to a 500,000 bpd surplus as US production exceeded forecasts. OPEC crude output fell 10,000 bpd in November to 29.09 million bpd.

US Production Remains Robust

American crude production continues near record levels. Output rose 0.3% week-over-week to 13.853 million bpd as of December 5, sitting just below the November record of 13.862 million bpd. The EIA raised its 2025 production forecast to 13.59 million bpd from 13.53 million bpd previously.

However, the active US oil rig count declined sharply from its 2022 peak. In the week ending December 12, the count stood at 414 rigs—marginally above the 4-year low of 407 rigs reached in late November. Over the past 2.5 years, the rig count has plummeted from a five-year high of 627 in December 2022, signaling future production constraints despite current record output levels.

Inventory levels tell a mixed story. As of December 5, crude stockpiles sat 4.3% below the five-year seasonal average, while gasoline reserves were 1.8% below normal and distillate inventories lagged 7.7% below seasonal norms. This suggests tight supply conditions in certain segments despite overall market weakness.

The confluence of weakening demand signals, geopolitical stability reducing supply concerns, and refiner hesitancy has created an environment where downside risks currently outweigh the structural support from production constraints and inventory draws.