On Tuesday, crude oil extended its decline, with Brent crude dropping below $60 per barrel and WTI nearing $55. Growing expectations of a ceasefire have significantly eased concerns over disruptions to Russian oil exports, while global inventories remain oversupplied.
Market positioning and volatility data highlight one-sided bearish sentiment. Money managers last week cut Brent net-long exposure to the lowest level since late October, with commodity trading advisors (CTAs) clearly skewed toward bearish bets. Trend-following traders are largely at maximum short positions. WTI’s next-month implied volatility fell to its lowest since April, while skew indicates a clear put bias.
**Ceasefire Hopes Rise, Disruption Fears Fade** Geopolitical risks are shifting from a price-supportive factor to a drag. According to reports, on December 15, the U.S. President stated he held "very good discussions" with European leaders, many of which focused on the Russia-Ukraine conflict. He noted that progress "seems to be going well" toward a potential peace deal. The latest ceasefire developments have emboldened traders to short crude. Despite ongoing Ukrainian strikes on Russian refineries and Caspian assets, Black Sea shipping risks, and the U.S. seizure of a Venezuelan supertanker, price action shows oil consistently weakens on optimistic negotiation headlines.
**Supply Side: High Inventories, Narrowing Refining Margins** On the supply front, both the EIA and IEA have warned of unprecedented oversupply, with global stocks at four-year highs. Recent U.S. data reinforced glut concerns. Commercial crude inventories fell by 1.8 million barrels, but the draw was smaller than expected. Cushing stocks rose for the first time in a month despite refinery runs at their strongest seasonal level since 2018. Crack spreads also reflect ample supply. The 3-2-1 crack spread slid to February lows, with gasoline and diesel margins retreating, signaling sufficient refinery feedstock availability ahead of year-end.
**Weak Demand Weighs on Sentiment** Demand shows no signs of alleviating the oversupply. U.S. gasoline demand remains soft, currently down 1.3% year-on-year. Distillate consumption rebounded above 2024 levels on heating demand, and jet fuel recovered from strike-related lows, but these pockets of strength failed to prevent crack spreads from weakening or inventories from staying comfortable. Globally, China’s November apparent oil demand rose 4.5% year-on-year, but Middle East spot markets are softening. Murban crude’s premium to Brent narrowed to October lows, with steep discounts offered to Chinese buyers.
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