Oil prices jumped more than 2% on Monday, lifting West Texas Intermediate crude above $58 per barrel, as investors recalibrated risk following renewed geopolitical tensions and cautious optimism around Ukraine peace talks. The move came after a sharp decline in the previous session and underscored how quickly sentiment can shift in thin, year-end trading. Yet beneath the rebound lies a market still wrestling with structural oversupply, soft demand growth, and one of its weakest annual performances in years.

Geopolitics Reasserts Itself in Energy Markets

The immediate catalyst for the rally was a flare-up in Middle East tensions. Saudi air strikes in Yemen and Iran’s declaration of what it described as a “full-scale war” involving the United States, Europe, and Israel revived long-standing fears of supply disruption across a region central to global oil flows. While no physical shortages have materialized, oil markets have historically been quick to price in tail risks when shipping lanes, production facilities, or regional stability appear threatened.

At the same time, developments related to Ukraine added a layer of complexity. Donald Trump said discussions with Volodymyr Zelenskyy had made “a lot of progress,” while Zelenskyy indicated that roughly 90% of a peace framework is agreed, even as key issues remain unresolved. For oil traders, any credible path toward de-escalation raises the prospect of additional Russian barrels returning to global markets, a factor that has capped rallies throughout 2025.

China’s Fiscal Signal Offers Demand Support

Beyond geopolitics, China provided a modest but notable boost to sentiment. Beijing announced plans to expand fiscal spending in 2026, reinforcing expectations that policymakers are prepared to support economic growth amid structural headwinds. For oil markets, stronger Chinese activity matters disproportionately, given the country’s role as the world’s largest crude importer. Even incremental improvements in industrial output, transport demand, or petrochemical consumption can help stabilize prices at the margin.

However, investors remain cautious. Previous stimulus efforts have often produced short-lived rallies in commodities, only to fade as underlying demand failed to accelerate meaningfully. This history has made traders more selective, favoring tactical positioning over long-term conviction.

Oversupply Keeps the Bigger Picture Bearish

Despite Monday’s rebound, crude oil remains on track for an annual decline of more than 20%, its steepest drop since 2020. Rising production from both OPEC+ and non-OPEC producers, combined with uneven global demand, has created a persistent surplus narrative. WTI was trading at 57.83 USD per barrel on December 29, up 1.92% on the day, but still down 18.54% from a year earlier. Over the past month alone, prices have slipped more than 2.5%.

Investor psychology reflects this tension. Short-covering and headline-driven rallies remain common, but longer-term capital has largely stayed on the sidelines, wary of being caught on the wrong side of a structurally soft market.

Looking ahead, oil’s direction will hinge on whether geopolitical risks translate into tangible supply constraints and whether China’s fiscal push can revive demand more convincingly. Until then, volatility is likely to persist, with rallies vulnerable to reversal as surplus fears reassert themselves.