Crude oil: Short-term surplus meets long-term supply risk

Brent crude continues to hold above the key USD 60 level, and WTI above USD 55, but the tone beneath the surface has turned increasingly heavy. The prompt futures discount to the six-month contract (see chart below) has widened to its deepest level since December 2023, a clear sign that near-term supply is ample, but not yet to the extent it will rekindle the so-called carry trade where crude is bought and stored on tankers to be sold at higher price in the future. The softening structure, coupled with weakness in physical markets from Europe to West Africa, points to a market drifting into a short-term surplus phase.

At the same time, tanker tracking data show the number of barrels held at sea climbing to record levels, as buyers grow more selective and sellers struggle to clear cargoes. The result is a classic picture of oversupply—contango on the futures curve, discounts in the physical market, and speculators increasingly willing to bet on further price weakness.

Yet despite widespread talk of a glut, Brent and WTI have so far managed to hold above their USD 60 and USD 55 handles (see charts below). Part of that resilience owes to improved risk sentiment across broader financial markets, amid renewed optimism that trade tensions may ease. Another part may reflect a deeper hesitation: traders know that while the market looks comfortable in the near term, the seeds of future tightness are already being sown.

A growing surplus, but no collapse

The latest shifts in the futures curve underscore how sentiment has changed. The prompt Brent discount to the six-month contract has widened sharply, reflecting a growing belief that OPEC+ output increases and rising non-OPEC supply will keep the market well stocked through the winter. Oil held on tankers—a rough proxy for logistical strain and unsold cargoes—has surged to a pandemic-era record. That volume acts as a buffer, ensuring short-term availability but also amplifying the sense that physical barrels are abundant.

Even so, the forward curve remains far from the extreme levels that would normally encourage large-scale storage trades. The current contango is modest compared to those seen during genuine oversupply phases, such as in 2020. This suggests that while the market acknowledges the surplus, it has yet to fully price in a protracted glut. There is still some faith that demand, or self-correcting supply dynamics, will eventually absorb the excess.

Speculators lean short but remain cautious

With Brent stuck below USD 65, speculative sentiment remains fragile. Managed money accounts have been reducing long exposure in recent weeks while adding to gross shorts, betting on further downside as inventories build and the curve softens. The Commodity Futures Trading Commission’s data blackout has limited visibility into exact positioning, but Brent crude data from the ICE Europe Exchange show a drop in the net long to a five-month low, and a jump in the gross short to a 13-month high. 

The investment problem

Beyond the immediate supply cushion lies a more structural issue: price levels that are too low to sustain future output. The U.S. shale patch, which has been the swing supplier of the past decade, is already showing signs of fatigue. The Permian Basin—America’s most prolific source of incremental supply—now requires roughly USD 61 per barrel to break even, well above the current WTI price of around USD 57.

At these levels, producers are reluctant to commit fresh capital. Drilling activity has slowed, and decline rates from existing wells are accelerating. If prices remain depressed, the risk is that production capacity erodes faster than expected. That would leave the market vulnerable to tightness later in the decade, especially if global demand continues to rise as projected.

This underinvestment trend is hardly new but increasingly acute. Investor pressure for capital discipline, tighter environmental regulation, and volatile pricing have kept upstream spending well below pre-pandemic norms. According to the IEA, global oil and gas investment remains about 25% below the 2015–2019 average. In a market still heavily dependent on aging fields that decline 4–6% annually, that gap quickly translates into lost barrels. The IEA estimates that more than 45 million barrels per day in new conventional supply must be developed by 2050 simply to replace declining production and maintain current output levels.

China quietly stockpiles

Adding a layer of complexity, China appears to be taking advantage of lower prices to top up its reserves. Recent satellite and customs data suggest steady inflows into both commercial and strategic storage facilities. With at least 11 new reserve sites planned through 2026, China’s capacity to absorb dips has increased materially.

This strategic buying—mirroring the steady gold accumulation by central banks since 2022—is often opaque in real time, yet it quietly underpins the market by offering a soft floor on price. It also illustrates how weakness can paradoxically tighten the future balance: cheap oil invites stocking up today, reducing the available cushion for tomorrow.

Market reluctant to fully price the glut

The apparent contradiction—ample barrels now but no aggressive contango—tells an important story. Traders see the surplus, but they also see limits to how long it can last. With U.S. shale discipline firm, OPEC+ output near capacity, and investment slow elsewhere, the market may be reluctant to push prices too far below marginal cost.

It’s also worth noting that even modest demand growth can quickly erase perceived oversupply. The IEA’s latest outlook sees global demand continuing to rise into 2026, driven by petrochemicals and emerging markets. Against that backdrop, today’s bearish sentiment starts to look cyclical rather than structural.

Near-term caution, long-term respect

For now, the path of least resistance remains lower. The market is grappling with seasonal demand softness, swelling storage, and negative sentiment. As long as Brent remains below USD 65, rallies will likely be sold into, and calendar spreads will reflect the ongoing length in prompt supply.

But it would be a mistake to treat the current weakness as the new normal. The energy system still depends on continual reinvestment to offset decline. Without prices high enough to incentivize that, production—especially from high-cost basins—will fade. The same low prices that comfort consumers today can set the stage for price spikes tomorrow.

In that sense, the oil market again reveals its cyclical rhythm: abundance fuels complacency, which inevitably breeds shortage. As the industry edges toward the trough of its investment cycle, crude could well re-emerge as one of the more compelling contrarian opportunities heading into 2026.