Oil Prices Edge Higher Amid Diesel Demand Surge And Holiday Trade

Oil Prices Edge Higher Amid Diesel Demand Surge and Holiday Trade

Oil prices gained on Monday in light, year-end trading as forecasts of colder temperatures in the U.S. and Europe bolstered diesel demand.

Brent crude futures rose 22 cents (0.3%) to settle at $74.39 per barrel, with the more active March contract closing at $73.99, up 20 cents. U.S. West Texas Intermediate (WTI) crude climbed 39 cents (0.6%) to $70.99 per barrel. Meanwhile, U.S. ultra-low sulfur diesel futures surged 2.5% to $2.30 per gallon, the highest since early November.

“Diesel prices are leading the energy complex,” noted TACenergy, a fuel distribution company. The firm highlighted that forecasts of colder weather are driving increased demand for diesel as a heating alternative to natural gas.

Heating degree days, an indicator of energy needs for space heating, are projected to rise to 499 over the next two weeks in the U.S., up from Friday’s estimate of 399, according to LSEG. The same forecasters predict a similar cold snap in Europe by January.

Adding to the bullish sentiment, U.S. natural gas futures soared 17% to their highest levels since January 2023, driven by frigid weather projections and growing export demand.

Declining U.S. Crude Stockpiles

Further support for oil prices could emerge from falling U.S. crude inventories, which analysts estimate dropped by about 3 million barrels last week. A Reuters poll revealed optimism stemming from recent reports of larger-than-anticipated drawdowns in U.S. crude stockpiles, partly attributed to heightened refinery activity and fuel consumption during the holiday season.

Last week, Brent and WTI posted gains of approximately 1.4%, aided by robust holiday travel demand and refining operations.

Broader Market Factors

Investors are also eyeing economic indicators from major oil-consuming nations. China’s Purchasing Managers’ Index (PMI) factory surveys, due Tuesday, and the U.S. Institute for Supply Management (ISM) survey on Friday will offer insights into the economic health of these countries.

Alex Hodes, an analyst at StoneX, cautioned that a weak Chinese economy could lead to an oversupplied oil market next year. However, reports of a planned record issuance of 3 trillion yuan ($411 billion) in special treasury bonds by Chinese authorities in 2025 have revived hopes for economic growth.

Geopolitical factors also remain in focus. Market speculation suggests that U.S. President-elect Donald Trump may implement stricter sanctions on Iran, potentially reducing Iranian crude oil exports to below 500,000 barrels per day. Such measures could remove over 1 million barrels of daily supply from the global market, potentially offsetting oversupply concerns.

Outlook

While forecasts of increased heating demand and tighter U.S. crude inventories provide near-term support, analysts warn that uncertainties around China’s economic performance and geopolitical developments could weigh on oil markets in 2024.