Oil Prices Rise from Lowest Monthly Level Despite Supply Surplus Burden

Oil prices rose on Wednesday after falling to their lowest level in a month in the previous session, with a decline in U.S. crude inventories, although the anticipated supply glut and a potential peace agreement between Russia and Ukraine limited gains.

Brent crude futures rose by 27 cents, or 0.43%, to $62.75 a barrel, while U.S. West Texas Intermediate crude futures increased by 24 cents, or 0.41%, to $58.19 a barrel.

Priyanka Sachdeva, senior market analyst at Phillip Nova, stated, "The slight gains appear to be more of a technical pause than a trend." She added, "Any increases we see today or in the future are largely driven by weak inventory indicators and pockets of short covering, but these increases will be short-lived and fragile."

The market still leans primarily toward a decline, as investors increasingly expect a supply surplus by 2026, without a compelling demand catalyst to offset it. The price of Brent and West Texas Intermediate crude fell by 89 cents on Tuesday after Ukrainian President Volodymyr Zelensky informed European leaders of his readiness to push for a U.S.-backed framework to end the war with Russia, with only a few points of contention remaining.

Tony Sycamore, a market analyst at IG, noted in a client memo, "If a final agreement is reached, it could lead to a rapid dismantling of Western sanctions on Russian energy exports," which could push West Texas Intermediate crude prices down to around $55. Currently, the market is awaiting further clarity, but there seems to be a risk of falling prices unless talks retract.

U.S. President Donald Trump stated that he directed his representatives to meet separately with Russian President Vladimir Putin and Ukrainian officials, while a Ukrainian official indicated that Zelensky might visit the United States in the coming days to finalize the agreement.

Britain, Europe, and the United States have recently intensified sanctions on Russia as part of an escalating pressure campaign, and India's purchases, the main buyer of Russian oil, are expected to reach their lowest level in three years in December.

Market sources, citing figures from the American Petroleum Institute, reported a decline in U.S. crude inventories last week, while fuel inventories increased. Previous estimates indicated a rise in U.S. crude inventories by 1.86 million barrels for the week ending November 21. The sources added that this was due to refineries resorting to alternatives to avoid violating Western sanctions.

Crude oil prices received some support from expectations of a potential interest rate cut by the U.S. Federal Reserve in December, following economic data showing a decline in retail spending and slowing inflation. A rate cut could stimulate economic growth and boost oil demand.

Oil prices had dropped more than 2% on Tuesday after Ukraine hinted that intensive diplomatic efforts from the U.S. administration to end the war against Russia could bear fruit. The end of the war in Ukraine could pave the way for lifting Western sanctions imposed on energy trade with Moscow, potentially increasing supply at a time when commodity prices have been severely impacted by expectations of oversupply next year.

An ABC News report yesterday indicated that Ukraine agreed to the terms of a revised peace agreement with Russia, although negotiations on some minor details are still ongoing, while Ukrainian President Volodymyr Zelensky stated that negotiations on the peace plan are still continuing with the United States.

In recent days, there has been intense diplomatic momentum led by Washington aimed at reaching a peace agreement to end the ongoing Russian-Ukrainian war since 2022, a step that could significantly impact the oil market, as Russia is one of the largest oil producers in the world and its oil exports are currently subject to stringent international sanctions.

Kyiv's National Security Chief, Rustam Umerov, stated that Ukrainian President Volodymyr Zelensky may visit the United States in the coming days to finalize an agreement with U.S. President Donald Trump to end the war.

However, Russia has confirmed that it will not allow any agreement to deviate from its objectives, which has helped keep oil losses under control, as Russia's stance raises doubts about the possibility of reaching a formal agreement, according to Ed Hayden Privett, an oil analyst at Onyx Capital Group.

The uncertainty was exacerbated by Russia's bombardment of the Ukrainian capital, Kyiv, on Tuesday with a barrage of missiles, resulting in six deaths and 13 injuries, disrupting electricity and heating systems. Giovanni Stonovo, an analyst at UBS Bank, stated, "It takes two to achieve this, and it remains unclear whether Russia will agree as well."

Analysts at Ritterbusch and Associates, a consulting firm for oil trading, confirmed that the hard part of the negotiations to end the war has not yet come, as significant gaps between the parties must be bridged. There is an increasing consensus among experts that crude oil supply growth in 2026 will outpace demand growth. Deutsche Bank projected a surplus of at least two million barrels per day next year, with no clear path back to a deficit until 2027, according to a memo released on Monday.

Analysts at Commerzbank Research stated that a peace agreement could help Russia increase oil production to the agreed OPEC+ levels. Sanctions imposed on the two giant Russian oil companies, Rosneft and Lukoil, and rules preventing the sale of refined petroleum products from Russian crude to Europe have led some Indian refineries to reduce their purchases of Russian oil.

Commerzbank noted that this has resulted in a decline in Russian oil exports and an increase in Russian crude stored on tankers at sea, which will become available if a peace agreement leads to the lifting of sanctions on Rosneft and Lukoil. Russian Deputy Prime Minister Alexander Novak stated that Russia is also discussing ways to expand exports to China.

In energy market developments, Iranian oil shipments accumulated at sea reached their highest levels since 2023, with the volume of Iranian oil stored on giant tankers offshore rising to about 52 million barrels, the highest level since May 2023, according to data from shipping information company Kepler.

This accumulation of Iranian oil stocks has led to increased discounts offered on various types, for example, the difference between the price of Iranian light crude and Brent is currently about $8 per barrel in the London market, compared to a discount of $4 last August.

China is the main buyer of Iranian oil, with private Chinese refining companies leading the list of importers; however, these companies have recently exhausted the official quotas needed to obtain permits to import more shipments from abroad, putting pressure on demand levels for Iranian crude.

Osama Rabie, head of the Suez Canal Authority, confirmed during a press conference yesterday that the return of Maersk Group container ships to the Suez Canal will represent a return in the right direction for the optimal path to sustain global supply chains as the shortest, fastest, and safest maritime routes connecting East and West.

He added, "The strategic partnership agreement is a key link in the future of joint relations between the two sides as it opens new horizons for cooperation in various maritime and logistical fields in addition to restoring the transit of the group's ships through the Suez Canal, which recorded the passage of 1,158 ships in 2023."

Rabie explained that the peace summit held in Sharm El-Sheikh last month succeeded in enhancing stability in the Red Sea and Bab al-Mandab region, paving the way for the return of navigation in the area to its normal rates in the upcoming period.

In China, Beijing has asked airlines to extend their reduction of flights to Japan until March 2026, indicating Beijing's readiness for a long-term dispute with Tokyo. The Chinese government last week began issuing instructions to airlines in the country to reduce the number of flights to Japan after remarks by Japanese Prime Minister Sanae Takachi regarding Taiwan angered China, and airlines were asked to make these changes for now, indicating that the situation may change in line with upcoming diplomatic developments.