Oil prices rose on Monday as traders bet on an increase in diesel demand, driven by expectations of colder weather in the coming weeks. The boost came amid thin late-year trading conditions, with market participants focusing on weather forecasts that predicted a drop in temperatures across the U.S. and Europe. This shift is expected to enhance diesel consumption, particularly for space heating, as a substitute for natural gas.

U.S. ultra-low sulfur diesel futures, which had already seen gains, rose further to reach levels not seen since early November. Diesel prices are currently leading the broader energy complex, according to fuel distributor TACenergy's trading desk. The firm cited forecasts of colder temperatures in both the U.S. and Europe as a key driver for the surge, as households and businesses are anticipated to rely more on diesel for heating purposes.

In the U.S., heating degree days, a metric used to gauge energy demand for heating, are projected to rise sharply over the next two weeks. This suggests an uptick in demand for energy, particularly diesel, as temperatures plummet. The forecasted cold snap is also anticipated to affect Europe, where similar conditions are expected to increase heating demand in January.

This uptick in diesel demand is occurring alongside a notable surge in U.S. natural gas prices, which spiked due to similar weather-related concerns and rising export demand. The natural gas futures surged to their highest level in nearly a year, reinforcing expectations that colder weather will drive further shifts in energy consumption patterns.

Beyond weather-related factors, investors are also looking to key economic data in the coming days. The release of China's PMI factory surveys and the U.S. ISM survey later this week are expected to provide insights into the economic health of two of the world’s largest oil-consuming nations. The state of China's economy remains a key concern for oil markets, with some analysts predicting potential oversupply in 2025 if growth continues to underperform expectations.

Additionally, there is speculation around U.S. foreign policy under President-elect Donald Trump. Market participants are anticipating that sanctions targeting Iran could significantly reduce the country’s crude oil exports, potentially removing over 1 million barrels of oil per day from the global market. If this occurs, the reduction in supply could have a notable impact on global oil prices.

Last week, both Brent and WTI crude oil prices gained ground, buoyed by a larger-than-expected drawdown in U.S. crude inventories, as refiners increased production to meet heightened fuel demand during the holiday season. This trend highlights the ongoing tightness in the market, as inventories fall while demand remains robust, especially for fuels like diesel.