Crude oil: short-term weakness masks long-term supply challenge

Crude prices tumbled on Wednesday after OPEC’s latest monthly report flipped its third-quarter projection from a 400,000-barrel daily deficit to a 500,000-barrel surplus. The revision—alongside forecasts from other agencies showing a larger surplus into 2026—was widely read as confirmation that the long-anticipated oversupply has arrived. The International Energy Agency in their monthly update increased its estimates for a record global oil surplus next year to just over 4 million barrels a day. Floating storage has surged in recent weeks, a visible sign of a market struggling to absorb excess barrels.

Both Brent and WTI remain rangebound, with support forming near USD 60 and USD 55 respectively. Brent’s front-month futures are down about 16% year to date, while total return performance, supported by still-positive but fading roll yields, shows a smaller 5.5% loss. The near-term outlook continues to signal softness amid plentiful supply and weak seasonal demand, yet the longer-term picture has turned more constructive after a significant shift from the International Energy Agency (IEA), which no longer expects global fossil fuel demand to peak before 2050.

The short-term setup is dominated by oversupply as months of rising OPEC+ output, led by Saudi Arabia driven by its quest to regain market share, and steady non-OPEC+ growth swell inventories heading into winter. Still, downside risks are partly offset by shrinking OPEC spare capacity as Saudi Arabia and the UAE raise production, leaving less buffer against future disruptions. Flows from sanctioned producers—Russia, Iran, and Venezuela—also remain a wildcard, while refined products such as diesel and jet fuel continue to trade firmly, helping underpin crude through resilient crack spreads.

In other words, the market is heavy but orderly. Traders continue to fade both sides of Brent’s USD 60–70 range, though the lower bound is increasingly vulnerable should winter prove mild and refinery margins soften further. Beneath the surface, however, structural tightness is quietly rebuilding.

The long-term narrative has shifted more supportive following the IEA’s World Energy Outlook 2025. In a reversal of previous forecasts, the agency now expects global oil and gas demand to keep rising until 2050 under its “current policies” scenario. Oil demand could reach 113 million barrels per day by mid-century—up from roughly 102 million today—driven by petrochemicals, aviation, and consumption in emerging markets. The change amounts to an admission that the energy transition will proceed more slowly than previously assumed.

OPEC, quick to embrace the new stance, dubbed it “the IEA’s rendezvous with reality,” noting that years of underinvestment and policy pressure have created an illusion of security. The IEA itself warns that natural declines will erode about 5.5 million barrels per day of capacity each year unless new projects are sanctioned. Brent in the USD 60s may appear comfortable for consumers, but such levels fail to incentivize large-scale investment in complex or capital-intensive projects. Oil majors remain disciplined, funnelling profits into shareholder returns, while many national oil companies face fiscal limits. The gap between perceived abundance and actual supply resilience could define the next cycle.

If depletion continues at current rates and demand grows modestly, the industry could confront a 20–25 million barrel per day supply gap by the early 2030s. Bridging it will require massive upstream spending, far beyond current levels. That imbalance underpins our view that crude could emerge as one of 2026’s more contrarian opportunities. Once the present surplus clears and inventories normalize, the market will need to reprice the true cost of future supply.

For now, attention stays fixed on near-term softness—ample supply, mild demand, and cautious OPEC+ management. But the IEA’s revised outlook is a reminder that low prices can sow the seeds of the next rally. Unless investment accelerates soon, today’s comfort could become tomorrow’s constraint.