Why Crude Oil Prices Are Caught Between Dollar Strength and Supply Concerns

WTI crude oil closed slightly lower on Tuesday, with February contract ( CLG26 ) dropping -0.13 (-0.22%), while February RBOB gasoline ( RBG26 ) inched up +0.0053 (+0.31%). The mixed close tells an interesting story: crude got hammered by a surging dollar, but geopolitical risks kept losses from getting worse.

The Dollar’s Heavy Hand on Oil Markets

Here’s what happened Tuesday: the dollar index ( DXY00 ) climbed to a 1-week high, and that’s when crude prices reversed from early gains and turned red. It’s a classic inverse relationship—when the greenback strengthens, oil becomes more expensive for foreign buyers, which typically pressures prices lower. But the selling didn’t cascade as hard as it could have, thanks to multiple bullish factors underneath the surface.

The EIA’s weekly inventory report released Monday evening added to the bearish pressure, showing crude supplies rose unexpectedly. Specifically, crude inventories climbed +405,000 bbl against expectations for a -2.0 million bbl draw. Gasoline stockpiles swelled by +2.86 million bbl, bigger than the +1.1 million bbl forecast. At Cushing—the critical delivery point for WTI futures—inventories jumped +707,000 bbl. These builds suggested demand might be softer than anticipated.

Geopolitical Risks Act as a Price Floor

Despite the bearish data, crude held support from persistent supply threats across three major producing regions. Venezuela faces a US blockade of sanctioned oil tankers, with the Coast Guard recently forcing the sanctioned tanker Bella 1 away from Venezuelan waters into the Atlantic. US forces continue shadowing the vessel as part of President Trump’s coordinated blockade strategy.

Nigeria, an OPEC member, saw the US launch strikes on ISIS targets in coordination with the Nigerian government. Beyond counterterrorism, these security operations highlight how supply disruptions from conflict can support oil prices. Russia’s export capacity has been squeezed hard over the past four months as Ukrainian drone and missile attacks targeted at least 28 refineries. Since late November, Ukraine has also ramped up strikes on Russian tankers in the Baltic Sea, with six vessels hit. New US and EU sanctions on Russian oil infrastructure have further curbed shipments.

OPEC+ Pauses, China Rebuilds: Support for Prices

The real price support came from OPEC+ signaling it will stick to its production pause plan. Multiple OPEC+ delegates confirmed the group expects to maintain this approach at its Sunday video conference, rejecting further supply hikes in Q1-2026. This matters because OPEC+ is still in the middle of restoring its 2.2 million bpd production cut from early 2024—it’s already raised output by 1.0 million bpd but has 1.2 million bpd left to restore. By pausing, the group acknowledges the emerging global oil surplus and avoids making a bad situation worse.

Chinese demand provided another tailwind. According to Kpler data, China’s crude imports this month are set to surge 10% m/m to a record 12.2 million bpd as Beijing rebuilds crude inventories. This inventory rebuilding cycle matters because it underpins demand when global markets are swimming in supply.

The Surplus Reality Check

Let’s be clear about the macro picture: the IEA forecasted a record 4.0 million bpd global oil surplus for 2026. OPEC even walked back its earlier forecast from October, revising Q3 2025 estimates from an expected deficit to a 500,000 bpd surplus. The EIA also raised its 2025 US crude production estimate to 13.59 million bpd from 13.53 million bpd, meaning American output keeps grinding higher.

US crude production in the week ending December 19 clocked 13.825 million bpd, just shy of the record 13.862 million bpd from November. Meanwhile, Baker Hughes reported Tuesday that active US oil rigs ticked up +3 to 412 rigs in the week ended January 2, recovering from the 4.25-year low of 406 rigs in mid-December.

The bottom line: crude is stuck balancing two opposing forces. Geopolitical risks and OPEC+ discipline provide a floor, but dollar strength and a looming supply glut create a ceiling. Until one side breaks through, expect more sideways price action.