Oil Market Faces 2 Million Barrel Surplus by 2026, Prices Expected to Hold Above $60

The oil market is on the brink of entering a period of significant supply surplus, with expectations of 1.5 million barrels per day in the fourth quarter of this year, expanding to over 2 million barrels per day by the first half of 2026. Despite the substantial surplus, the market is well-prepared, which is expected to prevent a chaotic drop in oil prices. Additionally, the anticipation of OPEC production cuts and the principles of inventory economics are likely to limit the downward movement of oil prices, making it unlikely for Brent crude to sustainably fall below 60 dollars per barrel.

Non-OPEC countries are experiencing robust growth in oil supply, with an expected increase of 0.9 million barrels per day from mid-2025 to the end of the year. This growth is primarily driven by Saudi Arabia and the United Arab Emirates, who have contributed almost entirely to the 1 million barrels per day increase in production since March. However, the overall supply growth within the OPEC "8-country group" has been uneven, with significant increases concentrated in June and declines in other months.

Global oil demand continues to grow but at a slower pace than historical trends. The anticipated demand growth for 2025 is 0.75 million barrels per day, significantly lower than the historical trend of around 1.1-1.2 million barrels per day. This slowdown is attributed to heightened trade tensions and the permanent reduction in oil demand due to the COVID-19 pandemic. The refining sector has also seen an increase in crude oil processing capacity, driven by temporary declines in refining capacity in Europe and the United States, leading to higher refining margins and increased operational rates for remaining refineries.

Despite the substantial supply surplus and slower demand growth, oil prices are unlikely to fall below 60 dollars per barrel for an extended period. This stability is supported by three key factors: inventory economics, OPEC market management, and market expectations. The far-end prices of Brent crude futures have remained stable between 65 and 70 dollars per barrel, indicating that any surplus is temporary and will eventually balance out. Additionally, if spot prices fall below 60 dollars per barrel, arbitrage opportunities in oil storage could become profitable, providing support to oil prices. OPEC's recent production increases, primarily from Saudi Arabia and the United Arab Emirates, suggest that further cuts are possible if prices fall to 60 dollars per barrel. The market's broad anticipation of the supply surplus is also expected to prevent chaotic selling, unlike previous significant drops in oil prices.