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Oil Prices Surge on Expanding Chinese Factory Activity, But Face Decline to End Year Lower

Oil prices rise on expanding Chinese manufacturing activity, but concerns over demand continue to weigh on oil prices, with oil set to end the year lower.

Oil Prices Rise After Positive Data on Chinese Manufacturing

Oil saw an uptick early Tuesday following the release of data showing that China’s manufacturing sector continued to expand in December, although at a slower pace. The official factory survey indicated a third consecutive month of growth, suggesting that government stimulus measures may be helping to support the economy. While this expansion did provide short-term support for crude prices, it comes amid broader concerns about long-term demand.

Brent crude futures rose by 47 cents, or 0.7%, reaching $74.46 per barrel as of 0130 GMT. Meanwhile, U.S. West Texas Intermediate (WTI) crude gained 49 cents, also a 0.7% rise, to settle at $71.48 per barrel. These gains came in response to positive economic data, which provided some relief to the oil market that had been struggling for much of the year due to sluggish demand from top-consuming countries.

Oil Prices Set to End Year Lower Due to Demand Concerns

Despite the recent gains in oil prices, both Brent and WTI are on track to end the year lower. As of Monday, Brent crude was down 3.2%, while WTI had lost 0.6%. This marks the second consecutive year of declines in crude prices, largely driven by weaker-than-expected demand in key oil-consuming countries like the United States and China.

The outlook for demand remains clouded, with analysts cautioning that global consumption may not rebound as strongly as previously expected. China's demand for energy has slowed due to ongoing economic challenges, and major oil-consuming nations have faced economic slowdowns that have reduced overall energy consumption.

China’s Manufacturing Activity and Impact on Oil Prices

China, the world's second-largest economy, continues to be a key player in determining global crude prices. The latest manufacturing data revealed that while activity expanded, it did so at a slower pace than in previous months. This slower growth is partly attributed to ongoing challenges in China’s real estate sector and broader economic conditions. However, the Chinese government has implemented measures, such as stimulus packages and economic reforms, aimed at boosting industrial production.

In response to these challenges, Chinese authorities have agreed to issue a record 3 trillion yuan ($411 billion) in special treasury bonds in 2025. This move is designed to inject liquidity into the economy and stimulate further growth in manufacturing, which could in turn bolster demand for energy and support the market in the short term. These efforts are seen as necessary to maintain China’s growth targets and ensure the continued demand for oil, especially in the face of global economic uncertainties.

Declining U.S. Inventories and Its Effect on Oil Prices

While the longer-term outlook remains uncertain, several short-term factors have supported the crude market. One such factor is the drawdown in U.S. inventories, which have been declining due to increased refining activity and rising fuel demand during the holiday season. Analysts are forecasting a decrease of about 3 million barrels in U.S. crude inventories for the week ending December 20, which would provide additional upward pressure on crude prices.

A larger-than-expected drawdown in U.S. stockpiles has contributed to the price increase for both Brent and WTI. Refineries ramped up their operations, aided by the seasonal demand for heating oil and gasoline. Additionally, the decline in crude inventories signals tightening supply conditions, which may offer temporary support for the market in the coming weeks.

Global Oil Prices and Supply Outlook for 2025

Looking beyond the immediate factors affecting crude, analysts are cautious about the long-term prospects. While OPEC+ has maintained production cuts in an effort to balance supply and demand, the global economic environment continues to present challenges. The potential for a further slowdown in China’s growth, coupled with weaker demand from other oil-consuming nations, could limit any significant recovery in oil.

Additionally, geopolitical tensions and market speculation around future OPEC+ actions will continue to influence the market. Any changes in the production policies of key oil producers could lead to significant volatility in crude prices.

Crude Market: Short-Term Gains vs. Long-Term Oil Prices Concerns

In summary, while oil prices have seen short-term gains following positive data from China’s manufacturing sector and a drawdown in U.S. crude inventories, concerns over long-term demand continue to weigh on the market. With global oil set to end the year lower for the second consecutive year, the outlook for 2025 remains uncertain. The balance between short-term stimulus measures and long-term economic challenges will play a critical role in shaping crude market conditions in the months to come.