The Myth of the Oil Glut Is Dead

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03-14 15:31

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The Myth of the Oil Glut Is Dead

By Cyril Widdershoven - Mar 13, 2026, 2:00 PM CDT

The Strait of Hormuz disruption has shattered the long-held belief in a global oil glut, revealing that the market was actually running with very thin spare capacity and fragile supply chains.

Even a record 400 million-barrel strategic reserve release failed to push prices down significantly.

Years of underinvestment in oil projects, limits to U.S. shale growth, and geopolitical risks mean markets could stay tight.

For almost a decade, the global oil debate has been dominated by a powerful narrative: the world is drowning in crude. Financial pundits, banks, and energy agencies were all hitting the drums to announce a structural “oil glut”. A majority in oil markets was following the theory that the combined impact of US shale expansion, Russian exports, and sanctioned Iranian barrels quietly appearing in markets, along with slower demand due to energy transition investments, would all subdue prices for years. As indicated by the IEA, but also others, oil markets were heading or had even entered an era of permanent abundance. Only some dare to question or challenge this.

The current crisis in the Gulf has not only shattered that illusion but also exposed the risks of believing in dreams.

The continuing war around Iran and the unexpected closure of the Strait of Hormuz, which blocked traffic, made clear with a big bang what may be the most important misconception in modern energy analysis. Let's challenge it all by stating the oil glut has never existed. The main misconception was not to include geopolitics and hardcore power politics. Most analysts and oil traders did not see that there was only a fragile balance that was out in the open, sustained by geopolitically risky supply chains and extremely thin spare capacity.

The market reaction to all of this right now is even more striking. In recent days, governments have released roughly 400 million barrels from their strategic petroleum reserves. In context, it is the largest coordinated emergency release ever attempted. Again, most parties, especially policymakers, supported, of course, by the IEA, by the logic of a true supply glut, believing that this move would crush prices. Reality, again, presented the opposite: crude oil prices barely moved downward. In fact, within a very short time, they continued to climb. You can clearly state that US President Trump’s statements, which moved the oil market by a very temporary 30%, had the same effect in the end: nil.

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The market should now start to realize that this implication is stark. If the releases of hundreds of millions of barrels of emergency crude don’t result in a market depression, the reality is that the system is not oversupplied but structurally tight.

To understand the reasons behind it, we first need to look at the scale of the disruption. Roughly 20 percent of global oil flows pass through the Strait of Hormuz, making it the most critical maritime energy chokepoint on Earth. Any partial disruption in this area will result in the removal of millions of barrels per day from global supply chains. Not only are barrels being removed, but more importantly, tankers reroute, insurance costs explode, and export logistics break down.

Again, foresight, or just thinking the unthinkable, recognizing changes in behavior, is needed. The current crisis has shown that the expectations, which were presented as a hard fact, that Iran is never going to close Hormuz, have now been proven wrong: Hormuz is effectively closed for a prolonged period of time. The disruption has also reached levels that analysts were only studying as a theoretical option, leaving no room to discuss resilience measures. At times, between six and eight million barrels per day of supply have been affected. The main reasons are clear: shipping risks, infrastructure attacks, operational slowdowns, and GCC producers' precautionary export cuts.

The market, until now, has also been relying on the theory that there will be safety valves to prevent a global oil market crisis. Again, the valves don’t exist or don’t work.

As most know, the global oil market system has relied for decades on the theory and statements of OPEC producers that there is a simple stabilizing mechanism: OPEC spare capacity. The main power player in this was always the OPEC Kingpin, Saudi Arabia, with support from others such as the UAE. Whenever prices rose sharply, Riyadh would be able to inject several million bpd into the market.

What has been forgotten is geography! Spare capacity only matters if it not only actually exists but also can be deployed and reach markets.

The real buffer at present is much lower, or doesn’t even exist, as shown by the current crisis. Before the US-Israeli attacks on Iran, OPEC’s spare production capacity was estimated to be between 3 and 4 million bpd, which is a very cozy cushion. Most of this is concentrated in Saudi Arabia and the UAE. Keep in mind, most of these spare production capacity figures are theoretical, as they are based on ideal conditions and infrastructure operating at maximum efficiency. The latter matters, ideal conditions and efficiency, have not been proven in recent years, but have always been taken for granted by traders and policymakers.

At the same time, it should have been realized that in practice, spare capacity cannot be switched on like a light. To reach these levels, non-producing fields must ramp up (time), export terminals must function normally and operate at stated levels, and there should be a safe passage for tankers through shipping lanes. In a Gulf conflict, especially with a closure of Hormuz, attacks on GCC states, and a growing possibility of Iranian proxy Houthis getting involved, these conditions do not exist.

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When doing a reassessment now, which should have been done already before, via foresight or Black Swan analysis, all of the above means that the global oil system has been operating much closer to its production ceiling than was assumed by traders, analysts, and energy agencies. Excel sheets or algorithms don’t always show reality. Global supply today hovers around 102 to 103 million bpd, while demand remains stubbornly high despite the energy transition narrative.

We are now looking at a dangerously narrow band, as the margin between available supply and actual consumption has shrunk.

At the same time, strategic petroleum reserves (SPRs) are meant to supply the final layer of protection against disruptions. The limits of this, and the theory behind it, have now been revealed.

400 million barrels entering the market may seem enormous, but keep in mind that the world currently consumes, on average, more than 100 million barrels every single day. If no oil were produced elsewhere, this would mean only four days of global demand. These volumes will be spread over several months, providing only marginal, less effective relief. It clearly doesn’t fundamentally change the current supply balance. It may even create a new problem.

First of all, every barrel released must be replaced, as governments cannot allow these emergency buffers to run low or remain empty indefinitely. When the Iran crisis is stabilized, all these countries will have to start buying new barrels to replenish their reserves.

This, which is partly missed in most analyses, means that the market is not only absorbing extra supply today, but creating additional demand in the future, 400 million barrels. This additional future demand, on top of already growing crude oil demand in the coming years, will come at a time when supply capacity is becoming increasingly constrained.

The outcome is clear, at least to some: oil markets will tighten, with or without an Iran crisis. This situation will persist even after the immediate conflict subsides. It also means, but most governments won't admit this, the SPR release is putting a price bottom for the future.

Another illusion that is currently collapsing is the idea that sanctioned oil provides a hidden surplus. In recent years, Russian and Iranian crudes have been flowing into global markets. Sanctions have not been effective, as Moscow and Tehran have been setting up opaque trading networks, or so-called shadow fleets. Market pundits have been citing these barrels as evidence that the world had more oil than it needed. The current crisis again shows these flows are not excess supply, but essential components of a fragile global system. The market will tighten very quickly if these flows are removed. Some could argue that this is the reason why Iranian crude volumes still move via Hormuz as we speak. Some parties do not want to shock the market even further, given all the negative consequences. Tehran and Moscow are still receiving revenue, which should not be the case.

US shale is another example of this misconception. Even though American crude oil production has grown dramatically over the past decade, caused by the shale revolution, making it the world’s largest oil producer, shale production is hitting its own limits. At present, the decline rate of wells is increasing, which means constant drilling to maintain output, aka, the need for continuing or even increasing capital. As seen right now, capital discipline among producers and investor pressure for returns is slowing down the pace of expansion. For global markets, shale can still grow, but it has no option to replace the massive geopolitical disruptions in the Gulf instantly. Volumes are not available, and there are also crude quality constraints.

At the same time, the oil sector is also facing years of declining upstream investment. Contrary to IEA reports, the world needs to counter the situation since the mid-2010s, as global spending, especially on new oil projects (on- and offshore), has been lagging structurally and even dangerously below the levels required to expand long-term capacity. One of the underlying reasons is that energy companies have been facing pressure from investors, regulators, and, especially, European governments, not only to reduce their overall hydrocarbon exposure but also to accelerate renewable investments. This situation, which has been increasingly criticized, is now a cause of shortages. The shift from more hydrocarbon investments to more renewables has created a paradox. The world is consuming and will continue to consume more than 100 million bpd of oil, while the investment pipeline to expand supply has been weakened or, at times, blocked entirely.

The above situation has eroded spare capacity over time. Even though production has been high, the ability to counter shocks (spare production) has declined dramatically. The world is now facing the reality of its own strategic mistakes.

Oil markets are not going to return to equilibrium instantly, even if peace is signed today. Markets should realize that not only has physical infrastructure across the region been damaged or strained by the conflict and operational disruptions, but also that it has been affected by the conflict and operational disruptions. At the same time, it is not physically or technically possible to restart export terminals, pipelines, and storage facilities at full capacity overnight.

Oil production itself is also highly sensitive to operational interruptions, as shut-down wells require careful re-pressurization and technical adjustments before they can return to stable output.

It should also be noted that shipping logistics will take time to return to normal, especially given the immense constraints around Hormuz, the Sea of Oman, and the Gulf itself. This will mean a situation in which supply restoration will be slower than many analysts assume.

To make matters worse, global oil demand continues to grow. If a market lacks spare capacity, even modest growth of 1 million bpd in a year will tighten it. If we also add the 400 million barrels of SPR replenishment, demand will not only be higher but also face a structural deficit for years.

In that extremely possible scenario, it will not be hard to see reasons to support a situation in which oil prices could remain elevated long after the immediate crisis fades. A possible new short-term baseline has already been discussed, hovering above $100 per barrel. This is not fiction or a temporary spike. If, in the next days or weeks, infrastructure damage increases (or worsens), combined with geopolitical tensions, levels of $120 or even $150 cannot be ruled out.

Analysts and policymakers should read history, as the latter offers a clear warning to be taken into account. Major oil shocks rarely disappear quickly, as shown by the crises of 1973, 1979, and 1990, each of which created prolonged periods of elevated prices and new geopolitical realities. The current shock follows a similar pattern but could even have much harsher long-term effects.

The geopolitical implications are profound, as energy security is back at the center of global strategic thinking. Governments are now looking at the uncomfortable reality that oil remains the backbone of the global economy. It is even worse; natural gas will exhibit the same features. The illusion of abundance has allowed Western policymakers and advisors to believe the transition away from hydrocarbons would be smooth. It would not put energy security at risk. The Hormuz crisis demonstrates the risks of that assumption.

Oil markets have never been defined by total production alone, but also by spare capacity, logistical resilience, and geopolitical stability. All of that has disappeared, resulting in price volatility. That is precisely the environment we are looking at right now.

The myth of the oil glut is over. The world realizes again that oil markets are fragile systems balanced on narrow margins. When margins disappear, the consequences will reshape the global economy.

By Cyril Widdershoven for Oilprice.com

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