Dollar Rally Weighs on Crude Oil as Supply Headwinds Persist

Mixed Price Action Amid Currency Headwinds

February WTI crude closed with modest losses of -0.13 (-0.22%) on Tuesday, while February RBOB gasoline posted a slight advance of +0.0053 (+0.31%). The divergence between crude and gasoline reflected broader market dynamics, with crude oil trading range-bound as it digested competing forces. A strengthening US dollar index—which reached its highest level in a week—exerted downward pressure on crude valuations, making dollar-denominated commodities less attractive to international buyers.

The retreat in crude oil prices occurred despite initial momentum gains early in the session. The reversal came as the dollar index surged, a development that historically creates headwinds for oil markets given the inverse relationship between currency strength and commodity demand.

Supply Side Dynamics Support the Tape

Despite the dollar-induced pressure, crude prices found some cushion from supply-side considerations. OPEC+ signaling proved constructive for the market Tuesday, with multiple delegates indicating the cartel remains committed to pausing production increases when it convenes for its monthly video conference on Sunday. This measured approach toward supply management provided price support amid otherwise challenging conditions.

China’s robust crude demand backdrop also offered a bullish underpinning. According to Kpler data, China’s crude imports are projected to climb 10% m/m this month, potentially reaching a record 12.2 million barrels per day as the nation rebuilds strategic reserves. This demand momentum from the world’s largest importer represents meaningful structural support for prices.

Geopolitical Supply Constraints

Multiple geopolitical flashpoints continue to constrain global oil supply, offering crude a floor beneath current levels. US military operations against ISIS targets in Nigeria—conducted in coordination with the Nigerian government—have heightened security concerns in Africa’s key OPEC member state. President Trump had previously cautioned that American forces would intensify operations if the militant group persisted in attacks on Christian communities.

Venezuelan oil logistics remain disrupted following US Coast Guard interventions. The sanctioned tanker Bella 1 was forced to divert from Venezuelan waters into the Atlantic Ocean last week as US naval forces maintained surveillance. When American personnel attempted to board the vessel near Barbados on Sunday, the ship retreated further offshore, underscoring the effectiveness of the Trump administration’s blockade strategy on Venezuelan shipments.

Russian crude export capabilities face mounting pressure from Ukrainian military operations. Over the preceding four months, Ukrainian drone and missile strikes have targeted at least 28 Russian refineries, materially constraining export volumes. Beyond refinery attacks, Ukraine has escalated strikes on Russian tanker fleets in the Baltic Sea, with at least six vessels damaged since late November. Compounding these battlefield losses, fresh US and EU sanctions targeting Russian oil infrastructure and shipping have further squeezed export channels.

Supply Surplus Tempers Upside

The broader market structure presents a structural headwind for crude. The International Energy Agency projected a record 4.0 million bpd global surplus for 2026 in mid-October, signaling abundance rather than scarcity over the medium term. OPEC+ acknowledged this reality when it decided November 30 to maintain its production pause through Q1 2026, having already announced a modest 137,000 bpd increase in December before halting further hikes.

The cartel faces the challenge of gradually restoring 2.2 million bpd in production cuts implemented in early 2024, with 1.2 million bpd still remaining to be phased back into markets. This gradual restoration process reflects an effort to balance output growth against emerging surplus conditions.

OPEC’s November crude production output slipped 10,000 bpd to 29.09 million bpd, indicating measured growth. Notably, the organization revised its Q3 2024 market assessment from deficit to surplus, attributing the shift to resilient US production and rising OPEC output. OPEC now projects a 500,000 bpd surplus for Q3, reversing the prior month’s -400,000 bpd deficit forecast. The US Energy Information Administration lifted its 2025 crude production estimate to 13.59 million bpd from the previous 13.53 million bpd, reinforcing expectations for elevated North American supply.

Inventory Data Disappoints

Monday evening’s EIA inventory release proved largely negative for crude oil valuations. Crude stockpiles unexpectedly expanded by 405,000 bbl when markets had priced in a 2.0 million bbl draw, a significant miss that pressured sentiment. Gasoline inventories ballooned by 2.86 million bbl, outpacing the 1.1 million bbl build that traders anticipated. Additionally, Cushing crude stockpiles—representing the delivery point for WTI futures contracts—accumulated 707,000 bbl.

On a more constructive note, distillate inventory builds came in lighter than expected, rising just 202,000 bbl versus forecasts of 1.0 million bbl, offering modest relief to the energy complex.

Seasonal analysis revealed mixed conditions in the inventory picture. US crude stocks as of December 19 sat 3.3% beneath their five-year seasonal average, suggesting underlying tightness. However, gasoline inventories ran 0.7% above the five-year norm, while distillate supplies remained 5.1% lean of seasonal norms, indicating differentiated supply conditions across product categories.

US crude production in the week ending December 19 contracted 0.1% w/w to 13.825 million bpd, tracking just below the record output of 13.862 million bpd achieved in early November.

Rig Count Stabilizes

Baker Hughes data released Tuesday showed US oil rig count recovering modestly, rising 3 units to 412 rigs in the week ended January 2 after bottoming at a 4.25-year low of 406 rigs during mid-December. The broader trend remains decidedly negative, with rig counts down sharply from the 5.5-year peak of 627 rigs reported in December 2022, suggesting cautious capital deployment in upstream drilling.

The crude oil price backdrop reflects a complex interplay between near-term supply disruptions and emerging medium-term abundance, with currency movements adding tactical volatility to an already nuanced market structure.