The Bearish Outlook for Oil: How Inventory Builds Could Weigh on Prices Through 2026

The U.S. Energy Information Administration (EIA) has issued a starkly revised outlook for global oil markets, projecting steep declines in crude prices through 2026 amid expectations of swelling inventories and weakening demand. The May 2025 Short-Term Energy Outlook (STEO) paints a picture of oversupply risks dominating the market, with Brent crude prices forecast to fall to $59 per barrel by 2026—nearly 27% lower than their 2024 average. This shift underscores a pivotal inflection point for investors, as geopolitical tensions, trade disputes, and supply dynamics reshape the energy landscape.

The Price Slide: Supply Outpacing Demand

The EIA’s downward revision of oil prices reflects a clear imbalance between production growth and demand growth. For 2025, Brent is now expected to average $68/b, down sharply from its March 2024 average of $81/b. The primary drivers are:

1. Accelerated Non-OPEC+ Production: The U.S., Canada, Brazil, and Guyana are set to add 1.2 million barrels per day (b/d) to global supply in 2025 alone. This surge, driven by shale and offshore projects, is outpacing demand growth, which the EIA has slashed to just 0.9 million b/d for 2025.
2. OPEC+ Policy Shifts: After years of output cuts to support prices, OPEC+ is unwinding its voluntary reductions. A May 2025 production increase of 411,000 b/d will expand further, potentially adding 0.6–0.7 million b/d to supply by year-end.
3. Trade-Induced Demand Drag: U.S. tariffs and retaliatory measures, such as China’s 34% tariffs on U.S. imports, are dampening economic activity. These policies have already contributed to a 6% drop in global oil demand growth projections since early 2024.

The Inventory Tsunami

The EIA anticipates global oil inventories to begin rising in mid-2025, marking a critical turning point. By late 2026, inventory growth could hit 0.8 million b/d annually—a level last seen during the 2014–2016 oil glut. Key factors include:
- Supply Overhang: Combined OPEC+ and non-OPEC+ production increases could exceed demand growth by 1.5 million b/d by late 2025.
- Storage Dynamics: U.S. crude inventories, while currently 2% below the five-year average, are projected to grow by 0.4 million b/d in 2025. By 2026, this rate could double as OPEC+ cuts fully unwind.
- Geopolitical Risks: While sanctions on Russia, Iran, and Venezuela could trim global supply by up to 1 million b/d, the EIA notes that such disruptions are unlikely to offset the broader oversupply trend.

Natural Gas and Propane: Secondary Markets Under Pressure

The oil market’s struggles are spilling into adjacent sectors. U.S. natural gas prices, though projected to rise modestly to $4.30/MMBtu in 2025, face headwinds from record LNG exports and high production. Meanwhile, propane prices could plummet 40% by 2026 due to trade-related oversupply. China’s tariffs have redirected U.S. propane exports, leaving Gulf Coast inventories to swell to 89 million barrels—13% higher than previously forecast.

Risks and Uncertainties

While the bearish outlook is clear, several variables could alter the trajectory:
1. OPEC+ Compliance: If members overdeliver on production targets, inventories could grow faster than expected.
2. Tariff Fallout: The full economic impact of U.S.-China trade wars remains uncertain, with demand potentially weakening further.
3. Sanctions Enforcement: A sudden disruption to Russian or Iranian exports could tighten markets, offering a short-term price boost.

Conclusion: Navigating the Bear Market

The EIA’s projections underscore a clear path forward for investors: prepare for lower oil prices through 2026. Key data points to watch include:
- Price Targets: Brent’s $59/b forecast for 2026 implies a 27% drop from 2024 levels.
- Inventory Growth: A 0.8 million b/d build in 2026 would mark the largest annual increase since 2016.
- Production Constraints: U.S. shale output, now expected to average 13.42 million b/d in 2025, may slow further if drilling costs rise due to tariffs.

For investors, this environment favors short positions in oil futures or energy equities with exposure to exploration and production (E&P) firms. Meanwhile, the natural gas and propane sectors offer cautionary tales of oversupply, suggesting a preference for utilities or LNG exporters with long-term contracts.

The EIA’s report leaves little doubt: the next 18 months will test the resilience of oil markets. With supply growth outpacing demand and inventories set to balloon, the path of least resistance for prices remains downward—unless geopolitical shocks or unexpected demand surges intervene.