It may be time to buckle up once again. Analysts are warning that global oil prices could be headed for a sharp correction as signs of oversupply flash red across the market. The US Energy Information Administration (EIA) projected in October that global oil inventories will climb by an average of 2. 1 million B/D in 2026, compared with about 1. 9 million B/D this year. The buildup is expected to peak early, with first-quarter additions averaging 2. 7 million B/D. This would place Brent crude under what the EIA calls “significant downward pressure. ” In its latest outlook, the agency forecast Brent to settle around 62/bbl by the close of 2025 and average near 52/bbl in 2026. Rystad Energy has similarly warned that next year could see an average surplus of 2 million B/D, while the International Energy Agency (IEA) projects an even steeper imbalance by 2026 of nearly 4 million B/D, which makes “it increasingly clear that something has to give. ” The market was already navigating choppy waters in recent weeks. US oil prices dipped below 60/bbl in mid-October, revisiting levels last seen in May before geopolitical tensions in the Middle East reversed the slide and temporarily lifted prices back above the 70/bbl handle in June. That rally, however, may have only masked the deeper imbalance now coming into clearer focus. Since June, West Texas Intermediate (WTI) and Brent crude prices have dropped by as much as 24% and 18%, respectively. Between March and June, China added some 140 million bbl of crude to storage, according to Rystad, which described the figure as a “huge number. ” The buildup that at times topped 1 million B/D cushioned the market through midyear as China, the world’s largest oil importer, effectively absorbed much of the extra supply flowing from OPEC+ members as they rolled back voluntary cuts. But China’s capacity to keep absorbing excess barrels has limits. Rystad expects some of the inventory to be drawn down early next year, and even if China maintains its record stockpiling pace, it may not be enough to offset the new supply entering the market. Analysts see three potential paths for market correction. OPEC+ could reverse course and reinstate production cuts to stem the buildup. Another possibility is that the enforcement of Western sanctions on Russia and Iran would tighten, curbing exports. A third scenario is that US shale producers, considered to be among the world’s most price-sensitive suppliers, slow their pace of growth in response to weaker margins. For now, it appears unlikely that OPEC+ will fully backtrack on the 2. 2 million B/D of cuts scheduled to be unwound by next year. More likely, preexisting bottlenecks may mean the group unwinds the cuts slower than expected, a possibility the EIA noted in its recent outlook. Russia, meanwhile, faces increasing pressure from the US and Europe over sanctions that are aimed at bringing the nation’s leaders to the negotiating table over the war in Ukraine. After the White House and European leaders adopted a tougher stance in late October, WTI prices bounced by about 4/bbl to around 61/bbl. The upward price action came after Indian and Chinese refiners appeared poised to reduce imports of Russian crude. But the impact of sanctions may prove short-lived since sanctioned barrels have repeatedly found their way into global markets, and if restrictions tighten further, OPEC+ has signaled that other members could offset any shortfall—another sign the organization is not preparing for a pullback. Adding further complexity is Ukraine’s ongoing campaign of drone strikes against Russian refineries, which have disrupted an estimated 38% of the country’s 6. 5 million B/D of refining capacity. Some facilities have since resumed operations, and the true impact remains murky given that roughly one-fifth of Russian refining capacity is typically offline at any given time for maintenance or upgrades. Production sites, however, remain untouched, which means Russian barrels are as eager as ever to find their way to foreign ports. The US continues to produce crude at record levels, bolstered by gains from shale fields and new offshore projects in the Gulf of Mexico. The EIA reported that output reached a record 13. 6 million B/D in July and raised its annual forecast slightly in October, projecting an average of 13. 5 million B/D through 2026. Should oil prices fall in the new year, however, the US shale patch will be among the first to feel the pressure given that many producers might already be operating at below breakeven oil prices. Enverus estimates that the marginal cost of US supply is climbing from roughly 70/bbl WTI today to nearly 95/bbl WTI by the mid-2030s. The breakeven price is expected to rise as shale operators exhaust their best acreage and move into lower-quality rock. Even Saudi Arabia could face strain from a significant drop in prices since recent reports place its fiscal breakeven above 90/bbl. While the oil price outlook appears to be decidedly gloomy, it is a more complicated picture when looking at natural gas. US gas prices have climbed with the benchmark Henry Hub trading near 3. 40/MMBtu in late October, up nearly 50% year over year, and the EIA expects prices to top 4/MMBtu by January. This climb has been driven in part by record US liquefied natural gas (LNG) exports and growing power-sector demand. The EIA forecasts US LNG capacity to rise by 5 Bcf/D by 2026, bringing total export capacity to roughly 16 Bcf/D. However, the LNG buildout in the US along with other projects in the Middle East and Africa could translate to softer prices beyond 2026. The analysis suggests that while LNG is looking at short-term strength, it will have to answer to long-term competition eventually.
Trent Jacobs (Sat,) studied this question.