For months, the oil market has been bracing itself for a looming large oversupply. Forecasters, investment banks, and analysts expect the overhang to depress oil prices at the end of this year and early next year as inventory builds begin to show up at the key pricing hubs.
The consensus appears to be that a glut will soon overwhelm the market. But estimates on how big the overhang will be vary, ranging from a super-glut of record proportions to more modest inventory increases in the historically weaker demand period in the first quarter of any year.
If the oil market were a simple function of supply and demand, the looming oversupply would have been easier to assess. As the market is anything but a simple supply/demand equation, and has never been such, the estimates of the size of the glut are in the realm of guestimates with a lot of ‘ifs’ and ‘what ifs’ thrown in.
There Will Be Glut…
The International Energy Agency (IEA) warned in its October monthly report that the expected global oil oversupply would be larger than previously anticipated, amid soaring supply and subdued demand.
Surging Middle East supply, combined with robust flows from the Americas, swelled oil on water in September by a massive 102 million barrels, equivalent to 3.4 million bpd, which is the largest increase since the pandemic, the agency estimated.
“Looking ahead, as the significant volumes of crude oil on water move onshore to major oil hubs, crude stocks look set to surge while NGLs start to drop,” the IEA said.
A week after the IEA published its report, all estimates of the size of the oversupply were thrown into question as the United States sanctioned Russia’s top oil producers and exporters, Rosneft and Lukoil.
There is a wind-down period until November 21 until the sanctions snap into place. Considering that they are the Trump Administration’s lever to press Russia into talks on peace in Ukraine, some analysts doubt they would be fully implemented after November 21.
But How Big?
Year to date, Rosneft and Lukoil have been exporting 3 million barrels per day (bpd) of oil, or roughly 3% of the global supply, Daan Struyven, Head of Oil Research at Goldman Sachs, said last week.
But Goldman expects the impact to be “likely more limited to global oil imports because core OPEC has spare capacity to offset some of the shortfall.”
Moreover, “trade networks often get reorganized in the aftermath of sanctions,” Struyven added.
Goldman is still fairly bearish on oil prices in the near term because of “very significant inventory builds” in the past months.
Last but not least, “some investors may have inferred from some of the events this year that the US administration may escalate to eventually deescalate,” Struyven noted.
Regardless of how long the sanctions would last, global trade flows have started to shift again as Russia’s key buyers, China and India, rush to replace sanctioned barrels with alternative supply, or at least to purchase Russian oil via non-sanctioned entities.
Chinese state-owned oil giants Sinopec, PetroChina, and CNOOC have reportedly suspended purchases of Russian oil, at least in the short term, until the sanctions situation and implications become clearer.
But independent refiners are likely to continue seeking Russian crude, although they will be more careful, analysts say.
Indian refiners are even more careful in these early days of the sanctions as they don’t want to run afoul of the U.S. Administration just as India is looking to have its massive 50% tariff on exports to the U.S. reduced.
Even after the U.S. sanctions on Russia’s top producers were announced, the World Bank last week forecast that the oil glut “has expanded significantly in 2025 and is expected to rise next year to 65% above the most recent high, in 2020.”
With oil demand growth slowing due to EV sales and stagnating oil consumption in China, the World Bank expects Brent crude oil prices to fall from an average of $68 this year to an average of $60 next year, which would be a five-year low.
Sunday’s decision by the OPEC+ producers to pause their reversal of the production cuts in the first quarter of 2026 “makes sense” as the market is expected to be in peak surplus through March next year, ING’s commodities strategists Warren Patterson and Ewa Manthey said on Monday.
“However, given recent US sanctions on Russia, there is plenty of uncertainty as to the size of this surplus,” the strategists added.
“If these sanctions disrupt Russian oil flows, it will eat into the expected surplus early next year, providing OPEC+ the opportunity to rethink its production policy in the early part of 2026.”
OPEC and its key members publicly dismiss the glut narrative.
The United Arab Emirates doesn’t expect oversupply on the oil market as demand remains solid, the UAE’s Energy Minister, Suhail Al Mazrouei, said on Monday.
“I’m not going to talk about an oversupply scenario. I can’t see that,” Al Mazrouei said at the ADIPEC energy conference in Abu Dhabi.
Yet, the pause in production hikes is a sign that OPEC+ is looking to prevent a price slump early next year if inventory builds accelerate.
The pause would also give time to OPEC and its allies, led by Russia, to ascertain whether the U.S. sanctions on the top Russian producers would materially dent supply or the market would reshuffle again to accommodate changed trade flows.
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