Energy Markets Show Sharp Pullback Amid Strong Dollar and Shifting Geopolitical Dynamics

Energy commodities retreated sharply on Wednesday as multiple headwinds converged in the market. December WTI crude oil futures declined 1.30 points, or 2.14%, while December RBOB gasoline fell 0.0672 points, or 3.36%, settling near 1.5-week lows. The combined pressure from a surging dollar index—which reached a 2-week high—and reports of potential Ukraine peace negotiations created the environment for this energy sector tumble.

Dollar Strength Pressures Commodity Prices

The dollar index’s climb to a 2-week high served as a significant headwind for energy prices. A stronger dollar typically weighs on commodities priced in US currency, making them less attractive to international buyers. This dynamic was compounded by geopolitical news suggesting that the Trump administration may be pursuing diplomatic channels with Russia regarding Ukraine, which eased some of the supply-disruption premiums previously built into energy prices.

Mixed Signals from Weekly Inventory Data

Wednesday’s EIA inventory report presented a complicated picture for crude oil and refined products. While crude stockpiles fell by 3.43 million barrels—exceeding the expected draw of 2.0 million barrels—gasoline and distillate inventories moved in the opposite direction. Gasoline supplies expanded by 2.3 million barrels versus expectations of only 50,000 barrels, while distillate stockpiles unexpectedly rose 171,000 barrels when a 1.1 million barrel drawdown was anticipated. At Cushing, WTI’s delivery point, inventories declined 698,000 barrels.

Current inventory levels remain below seasonal averages: crude is 5.0% below the 5-year average, gasoline stands 3.7% below, and distillate is 6.9% below seasonal levels.

Russian Export Curbs Provide Underlying Support

Despite near-term weakness, longer-term supply concerns continue to underpin the market. Vortexa data from Wednesday revealed that Russia’s oil product shipments collapsed to 1.7 million barrels per day during the first 15 days of November—the lowest level in over three years. This reflects ongoing damage to Russian refining infrastructure from Ukrainian military operations, which have targeted at least 28 Russian refineries in the past three months.

Ukraine has effectively eliminated 13% to 20% of Russia’s refining capacity by late October, reducing output by approximately 1.1 million barrels per day. Combined with new US and EU sanctions targeting Russian oil companies, infrastructure, and tanker fleets, these factors have substantially crimped Russian export capabilities. Additionally, stationary floating storage rose 1.1% week-over-week to 103.41 million barrels in the week ended November 14—the highest level since June 2024—suggesting market participants continue managing supply dynamics.

OPEC Adjusts Forecasts as Surplus Emerges

OPEC significantly revised its outlook last Wednesday, shifting its Q3 global oil market estimates from a projected deficit to a surplus position. The organization now forecasts a 500,000 barrel-per-day surplus for Q3, reversing last month’s estimate for a 400,000 bpd deficit. This turnabout reflects stronger-than-expected US production gains and increased OPEC output.

The EIA simultaneously raised its 2025 US crude production forecast to 13.59 million barrels per day from the previous estimate of 13.53 million bpd. US crude production in the week ending November 14 actually dipped 0.2% to 13.834 million bpd, retreating from the prior week’s record high of 13.862 million bpd. Meanwhile, the Baker Hughes count showed US oil rigs at 417 in the week ending November 14, up 3 rigs but still modestly above the 4-year low of 410 set in August.

Production Pause Signals Market Caution

OPEC+ responded to emerging surplus conditions by announcing at its November 2 meeting that members would raise production by 137,000 barrels per day in December but then pause production increases through Q1 2026. This cautious approach reflects recognition that the market is transitioning from tight conditions to oversupply. The organization is attempting to restore all 2.2 million barrels per day in production cuts made in early 2024, with 1.2 million bpd remaining to be restored.

OPEC’s October crude production climbed 50,000 bpd to 29.07 million bpd—the highest level in 2.5 years—demonstrating the group’s commitment to gradual supply expansion despite surplus warnings.

Geopolitical Risks Remain as Structural Support

Longer-term energy security concerns persist. Iran’s recent seizure of an oil tanker in the Gulf of Oman, combined with reported US military preparations for possible Venezuela operations—where global crude reserves concentrate in the world’s 12th-largest producing nation—provide structural underpinning to the market. The IEA forecasted in mid-October that global oil markets could face a record surplus of 4.0 million barrels per day in 2026, underscoring the scale of the supply-demand rebalancing underway.