Oil Prices Ease After 6% Rally, Fed Rate Decision Eyed

Oil futures retreated slightly on Monday, slipping from multi-week highs as traders locked in profits after a 6% rally last week.

Attention now shifts to the Federal Reserve’s upcoming meeting, where policymakers are expected to announce a 25-basis point rate cut. Lower interest rates can stimulate economic growth and, in turn, boost oil demand.

“Crude oil reached the upper range of recent highs, prompting light profit-taking,” noted Tony Sycamore, IG market analyst. He added that with many institutional traders reducing positions ahead of the festive season, further upside may be muted until new catalysts emerge.

Despite the slight decline, concerns about supply disruptions kept prices supported. Recent U.S. sanctions on Iranian entities and threats of tighter restrictions on Russia’s oil exports continue to fuel upward pressure.

Geopolitical Risks Support Oil Prices

Tensions in global supply chains remain a critical factor for oil markets. U.S. Treasury Secretary Janet Yellen recently signaled that Washington may expand sanctions on Russia’s “dark fleet” tankers and Chinese financial institutions aiding Russian trade. These measures are designed to curb Russia’s oil revenue amid its war in Ukraine.

At the same time, new sanctions targeting entities involved in Iranian oil exports have driven prices for Iranian crude, particularly in China, to their highest levels in years. Analysts anticipate the incoming Trump administration will further ramp up pressure on Iran, increasing supply risks.

Adding to concerns, European Union sanctions on Russian oil implemented last week have tightened markets further. Sycamore emphasized that geopolitical uncertainty, combined with supply constraints, will likely remain a floor for prices.

Global Demand Outlook Poses Challenges

While supply risks dominate near-term trends, forecasts of ample production and weakening demand could weigh on prices heading into 2025. The International Energy Agency predicts robust supply growth next year, which may offset any short-term disruptions. Meanwhile, China’s oil consumption—pegged as the world’s second-largest—has reportedly peaked, with CNPC forecasting a demand decline post-2023.

Key interest rate cuts by central banks in Canada, Europe, and Switzerland last week have provided additional tailwinds for crude. However, oil markets remain focused on the Fed’s December meeting. Markets currently price a 93.4% chance of a 25-basis point cut, but expectations for further reductions in January remain slim.

Key Takeaways:

• Geopolitical Risks: U.S. sanctions on Russia and Iran tighten supply outlooks.

• Fed Focus: Traders await a likely 25-basis point rate cut this week.

• Demand Outlook: Ample supply and China’s consumption peak may weigh on 2025 prices.

While oil faces headwinds from a cautious demand outlook, geopolitical tensions and monetary policy decisions could spark renewed volatility in the coming weeks.