Crude Oil Prices Drop Amid Indications of Strong Worldwide Supply

Oil and Gas Market Update

On Wednesday, February WTI crude oil (CLG26) ended the day down $1.14, a 2% drop, while February RBOB gasoline (RBG26) slipped by $0.061, or 0.36%.

Both crude oil and gasoline prices experienced significant declines, with crude reaching its lowest point in two weeks. The sell-off was triggered by the United States easing certain restrictions on Venezuelan oil exports. Additionally, President Trump announced that Venezuela's interim government had agreed to release up to 50 million barrels of previously sanctioned, high-quality oil to the US.

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Later in the day, crude prices rebounded from their lowest levels after the EIA reported a larger-than-expected decrease in weekly US crude inventories. Rising geopolitical tensions also lent support to oil prices, following the US seizure of a Russian-flagged tanker accused of violating sanctions. Furthermore, the S&P 500’s climb to a new record high reflected optimism about the economy, which bodes well for energy demand.

Earlier, crude prices faced downward pressure when the US Energy Department announced plans to partially lift sanctions, allowing Venezuelan oil and petroleum products to reach international markets. This move could increase the global oil supply. Venezuela currently ranks as OPEC’s twelfth largest oil producer.

Demand concerns also weighed on oil after Saudi Arabia reduced the price of its Arab Light crude for February deliveries to customers for the third consecutive month.

Morgan Stanley now expects the global oil surplus to grow and peak mid-year, putting further strain on prices. The bank lowered its first-quarter crude price forecast to $57.50 per barrel (from $60), and its second-quarter estimate to $55 per barrel (down from $60).

According to Vortexa, as of January 2, the volume of crude oil stored on tankers idled for at least a week dropped by 3.4% from the previous week, reaching 119.35 million barrels.

Robust Chinese demand continues to support oil prices. Kpler data shows that China’s crude imports are set to rise by 10% month-over-month in December, hitting a record 12.2 million barrels per day as the country rebuilds its reserves.

Oil prices also found support after OPEC+ reaffirmed its decision to halt production increases in the first quarter of 2026. At its November 2025 meeting, OPEC+ agreed to boost output by 137,000 barrels per day in December, but will pause further hikes in early 2026 due to an anticipated global surplus. The IEA projected a record 4 million barrels per day surplus for 2026. OPEC+ is working to restore the 2.2 million barrels per day cut made in early 2024, with 1.2 million barrels per day still to be reinstated. In November, OPEC’s crude output slipped by 10,000 barrels per day to 29.09 million barrels per day.

Additional Insights

Over the past four months, Ukrainian drone and missile strikes have targeted at least 28 Russian refineries, restricting Russia’s ability to export crude and tightening global supplies. Since late November, Ukraine has intensified attacks on Russian tankers, with at least six vessels hit in the Baltic Sea. New US and EU sanctions on Russian oil companies, infrastructure, and tankers have further limited Russian exports.

Last month, the IEA forecasted that the global crude surplus would reach a record 3.815 million barrels per day in 2026, up from a four-year high of over 2 million barrels per day expected in 2025.

OPEC recently revised its third-quarter global oil market outlook, shifting from a deficit to a surplus as US production exceeded expectations and OPEC increased its own output. The group now anticipates a 500,000 barrel per day surplus in Q3, compared to last month’s projection of a 400,000 barrel per day deficit. The EIA also raised its 2025 US crude production estimate to 13.59 million barrels per day, up from 13.53 million previously.

The latest weekly EIA report presented mixed signals. On the downside, gasoline inventories surged by 7.7 million barrels to a ten-month high—well above the expected 2 million barrel increase—as US gasoline consumption fell to a one-year low of 8.17 million barrels per day. Distillate stocks also climbed by 5.59 million barrels to a one-year high, surpassing forecasts. Crude inventories at Cushing, the WTI futures delivery hub, rose by 728,000 barrels. On the upside, total US crude inventories dropped by 3.83 million barrels, a larger draw than the anticipated 1 million barrel decrease.

The EIA’s report for the week ending January 2 revealed that US crude oil inventories were 4.1% below the five-year seasonal average, gasoline stocks were 1.6% above average, and distillate inventories were 3.1% below the seasonal norm. US crude production for the week was down 0.1% from the previous week, at 13.811 million barrels per day—just shy of the record 13.862 million barrels per day set in early November.

Baker Hughes reported that the number of active US oil rigs rose by three to 412 in the week ending January 2, rebounding from the 4.25-year low of 406 rigs seen in mid-December. Over the past two and a half years, the US rig count has dropped sharply from a 5.5-year high of 627 rigs recorded in December 2022.