Despite expectations of a supply glut persisting until 2026, low oil prices may act as a buffer by influencing supply-demand dynamics. Analysts warn that a pause in OPEC+ production hikes or a resurgence of geopolitical risk premiums could trigger a rapid rebound in oil prices.
Amid a global oil supply surplus, international crude prices have plunged to their lowest levels in nearly five years this week. This downturn may help slow production growth and stimulate demand, potentially mitigating the projected supply glut expansion by 2026.
"Current prices are unsustainable. We're already seeing signs of reduced rig counts and rising demand," said Josh Young, Chief Investment Officer at Bison Interests. Baker Hughes data shows U.S. active oil rigs fell approximately 14% year-over-year as of December 12.
"The market will likely self-correct within the next year or so, transitioning into a supply deficit," Young added.
Dow Jones Market Data reveals both U.S. and global benchmark crude prices closed at their lowest levels since February 2021 on Tuesday. The January WTI contract settled at $55.27/barrel, while February Brent crude closed at $58.92/barrel.
Rebecca Babin, Senior Energy Trader at CIBC Private Wealth, noted this year's price weakness stemmed primarily from "oversupply compounded by weak market sentiment, with OPEC+ policy accelerating rather than solely driving the trend." Earlier this year, OPEC+ lifted production cuts faster than anticipated.
Babin observed that even before OPEC+ began reversing cuts, markets had anticipated 2024 oversupply - with demand growth projected around 1 million barrels/day versus supply growth estimates of 1.6-1.8 million. "This imbalance meant markets were destined for oversupply regardless, leaving prices vulnerable," she explained.
An Exceptional Year for Oil Markets Multiple factors made 2024 particularly unusual for oil markets.
"The market's most distinctive feature has been the rare convergence of resilient supply, weak demand, and dramatically reduced geopolitical risk premiums," said Henry Hoffman, co-portfolio manager at Catalyst Energy Infrastructure Fund.
Hoffman cautioned prices could reverse quickly if OPEC+ pauses production increases or if geopolitical premiums return due to failed peace prospects or stricter enforcement of Western sanctions on Russia.
OPEC+ actions remained a key market driver this year. Babin noted the group's decision to raise quotas sooner and faster than expected "added incremental supply to an already loose market, accelerating price declines."
Meanwhile, non-OPEC supply, particularly from U.S. shale producers, remained robust due to efficiency gains and consolidation - further exacerbating oversupply and reinforcing bearish futures sentiment, Babin added. She suggested OPEC+'s moves may have aimed to prevent further market share losses and reduce excess idle capacity.
EIA data shows OPEC's spare crude capacity doubled to 4.6 million barrels/day in 2024 from 2.3 million in 2023. Bison's Young described this as essentially "shadow inventory" that could enter markets anytime.
Young believes OPEC+ may seek renewed cuts to better assess true spare capacity levels, potentially using upcoming audits and recent quota shortfalls to credibly claim reduced spare capacity.
2026: A Repeat of 2024? Expectations of prolonged global oversupply continue pressuring prices, partly due to optimism about Russia-Ukraine conflict resolution. Simultaneously, weak U.S. employment data has raised concerns about slowing oil demand growth.
Simon Wong of Gabelli Funds noted geopolitical risk premiums and China's strategic crude purchases helped stabilize prices for much of 2024. Without such premiums, Wong said, "prices would have been lower - which we're now seeing."
However, Rob Thummel of Tortoise Capital observed that geopolitical risk premiums have "largely disappeared" this year as markets slipped into oversupply.
IEA forecasts show global oil oversupply reaching 3.8 million barrels/day by 2026, up from 2.3 million in 2024. Thummel noted low prices could boost global demand in coming years, with long-term demand growth still expected.
For oil traders, 2026 may resemble 2025 in key aspects. CIBC's Babin predicts early 2026 trading will focus on rising inventories pressuring prices, before shifting to whether markets stabilize in second half as "inventories draw down and low prices trigger supply responses."
"2026 looks set to extend current trends: challenging supply-demand balance, persistent volatility, and structural vulnerability to sharp rebounds - but only if meaningful shifts occur in supply, demand or policy," Babin concluded.
Comments