As always, there is a huge split between oil price bulls and bears which is hardly surprising given the massive uncertainty about the geopolitical environment. Will the ceasefire hold? Will Russia accept a peace deal? Will investment in Venezuelan oil rise and increase production?
Right now, major forecasters are arguing that next year should see oil supply greatly outpace demand, as the graph below shows. (Latest forecast from EIA and the IEA.) This is predicated on Persian Gulf production and exports returning to pre-war levels in the near future, The implication is that oil prices will be much lower next year than even the pre-war levels, but quite a few have derided those forecasts.
A number of points have been raised by the price bulls, including that the U.S.-Iran ceasefire is shaky and might not hold, which is very true. That would certainly mean higher prices although exactly how that plays out (occasional bombing versus continuing attacks on tankers) will determine just how elevated prices would be and how persistent the higher levels. And without question, the history of the industry, especially post-1973, is one of frequent supply disruptions.
Pirce bulls also point out that the IEA and others spent most of the year before the war describing a major and growing surplus that should have, but didn’t, push prices down significantly. The figure below shows the oil market balance projected by the IEA in early January 2025 and the actual as it developed (estimate in the January 2026 Oil Market Report). The IEA ultimately estimated that supply was 2.5 mb/d over demand in 2025, which is large by historic standards.
But despite this, prices did not weaken significantly last year and commercial inventories did not build as expected. The figure below shows OECD on-land stocks, those reported to the IEA as opposed to estimate by satellite imagery, and they grew much less than anticipated, by about 130 million barrels or about 400 tb/d. Even if one assumes that non-OECD stocks grew by the same amount (demand being relatively similar), that still leaves about 1.5 mb/d of supply unaccounted for.
Back in 1998, the IEA’s David Knapp labeled this phenomenon ‘missing barrels’ (which I anointed as ‘Knapps’) and it heralded a major price collapse. This time there is much better information about the location of oil inventories due to satellites monitoring storage tanks outside the OECD as well as tankers being used for floating storage. This allowed the IEA to report that approximately 300 million barrels of the surplus consisted of sanctioned oil located in tanker storage and another 100 million barrels was apparently bought by China for its strategic reserves (a very prescient move).
That explains why prices held up last year despite the glut: supply did exceed demand but most of the surplus didn’t enter the market. With the start of the U.S.-Iran War, those inventories were made available and cushioned the supply shock. China reduced its imports by a reported 4 mb/d and the U.S. eased sanctions on Russian oil, allowing large quantities to be sold. The combination covered a significant amount of the net market loss, as much as 75% of the barrels that the Gulf exporters couldn’t supply.
This negates the simplistic argument that current projections of a glut next year cannot be trusted because last year’s proved incorrect, at least in terms of the price impact. At the same time, it doesn’t mean that next year’s surplus will translate into major price pressure as the oil may not all enter the market. Obviously, how much might become sanctioned oil floating in tankers cannot be predicted since it depends mainly on developments in the Ukrainian War and U.S. decisions about sanctions on Russia. Predicting what either Putin or Trump will do is beyond anyone’s ability.
But IEA member countries and China are likely to purchase significant quantities of oil to replenish their strategic stocks. Presumably, they will not attempt to replace the entire amount in 2027; that would be about 800 million barrels or over 2 mb/d, which would absorb about half of the EIA’s projected surplus and a bit more than a third of what the IEA expects. But even assuming purchases are planned to replace the oil over two years, they would still postpone the glut until later next year.
Certainly, there are supply risks on the downside, including the potential for the Iranian War to restart or at least an extended closure of the Straits of Hormuz, new U.S. sanctions on Venezuela, where production has been growing, and Russian difficulties overcoming Ukrainian strikes on their oil infrastructure.
Upside risks for supply also exist, including continued growth in Venezuelan production, full production being restored in the Gulf, and slightly more Iranian supply. Resolution of the Ukrainian War and an end to sanctions on Russia could make a huge difference, but that is highly uncertain.
Still, a glut next year seems highly likely and while a significant portion of the surplus will probably go into strategic stocks and more into floating storage due to sanctions, as the year progresses, commercial inventories will grow and there will be increased pressure on prices. OPEC could respond but that would almost certainly mean relying heavily on the Saudis, as the Russians are almost certain to abstain from new quotas. The departure of the U.A.E. from OPEC and its intention to raise production substantially could make the Saudis reluctant to shoulder the burden of supporting prices, especially as the surplus is likely to continue into 2028. Rumors that Iraq is considering a similar move, or at least demanding a higher quota, only worsen pressure on OPEC and the Saudis.
Overall it seems likely that the surplus next year will be significant but ameliorated by government purchases and sanctions, delaying the pressure on prices. But the experience of 2025 is unlikely to be repeated and there is a growing likelihood of a repeat of 2014, when the Saudis, seeing a growing glut and reluctance of others to cut production, will stand back and let prices drop. It will be good news for consumers, but the industry will face serious financial pressure.
