Oil Prices Edge Higher Amid Oversupply Concerns, But Bearish Outlook Persists

Oil prices inched up 1% in early May, driven by bargain-hunting buyers at critical technical support levels. Yet the rally remains fragile against a backdrop of oversupply, geopolitical tensions, and weakening demand. West Texas Intermediate (WTI) crude held near $57/barrel, while Brent dipped below $60, highlighting the precarious balance between short-term resilience and long-term risks.

The Technical Bounce vs. Oversupply Realities

The 1% uptick in WTI reflects temporary buying interest as prices tested multi-year lows. Analysts note that $55-56 has historically acted as a psychological floor for WTI, attracting investors seeking entry points. However, this optimism is tempered by a projected 1.4 million b/d surplus in Q3 2025, driven by OPEC+’s aggressive output increases.

Supply Overhang Dominates the Narrative

OPEC+’s decision to add 2.2 million b/d to global supply by late 2025 has exacerbated oversupply fears. Even more concerning is non-compliance: Kazakhstan alone exceeded its quota by 300,000 b/d in Q1 2025, contributing to a collective OPEC+ overproduction of 1.1 million b/d. This undermines efforts to stabilize prices, with traders now pricing in a prolonged period of weak fundamentals.

Meanwhile, U.S. producers are split. ExxonMobil and Chevron continue targeting 7-9% production growth, but independents like EOG Resources have slashed capital spending by $200 million and trimmed growth forecasts to just 2%—a stark acknowledgment of the price environment.

Demand Growth Slows, Trade Wars Bite

Global oil demand growth for 2025 has been revised down to 0.9 million b/d, with trade disputes and slowing GDP growth weighing heavily. The U.S.-China tariff war, featuring 10% U.S. import duties and retaliatory 34% tariffs from Beijing, has depressed trade flows. Standard Chartered now sees 2025 prices at just $64/barrel, a $16 drop from earlier forecasts, citing “extreme pessimism” over demand.

Asian demand has been a rare bright spot. China’s crude imports hit a 20-month high of 12 million b/d in March, fueled by discounted Russian and Iranian oil, while India boosted Russian crude imports to a nine-month peak. However, these gains are insufficient to offset broader weakness.

Inventory Drawdowns Offer No Silver Lining

U.S. gasoline inventories fell by 4.5 million barrels in late April—exceeding expectations—but this was largely due to seasonal refinery maintenance, not stronger demand. Distillate stocks also declined, yet the broader picture remains one of oversupply. Speculative traders have pared bullish bets, with WTI net long positions hitting an eight-month low, amplifying price volatility as positions are unwound.

Bearish Forecasts and Policy Risks

Bank analysts are uniformly pessimistic. Morgan Stanley forecasts $62.50/barrel for Brent in 2025, down $7.50 from prior estimates, while Goldman Sachs sees prices at $68, a $9 drop. The risks extend beyond economics: Russia’s 2025 energy revenue forecast was slashed by 24%, straining budgets and potentially forcing production cuts. Meanwhile, U.S. sanctions on Russian oil exports remain a wildcard, though their impact is diluted by rising non-OPEC+ production.

The Long Game: Declining Shale, Underinvestment

While near-term prices are bearish, long-term risks loom. Permian Basin shale productivity has dropped 15% since 2023, and upstream oil investment remains 18% below pre-pandemic levels. This could create supply bottlenecks beyond 2026, but for now, the focus remains on oversupply.

Conclusion: A Bearish Near-Term, With Long-Term Uncertainties

Oil’s 1% rise in early May is a temporary reprieve rather than a reversal of the bearish trend. Oversupply pressures, weak demand growth, and geopolitical headwinds will likely keep prices subdued. The projected 1.4 million b/d surplus in Q3 and bank forecasts (e.g., Standard Chartered’s $64/barrel) underscore the risks.

Investors should monitor technical support levels ($55-56 for WTI, $60 for Brent) and OPEC+ compliance rates. While Asian demand and shale’s long-term challenges offer eventual hope, the path ahead remains fraught with volatility. For now, the market is in a race between oversupply and the next catalyst—whether it’s OPEC+ policy shifts or a geopolitical shock—to redefine the trend.

In this environment, the safest bet is caution: prices are likely to remain range-bound, with downside risks dominating until supply discipline or demand resilience proves decisive.