Oil market braces for glut amid weak demand and rising supply
Agencies
Worries over the health of the global economy amid escalating trade protectionism together with an accelerated unwind of OPEC+ output cuts pushed Brent crude to a four-year low of $60/bbl in early May – though prices have risen off their lows. Responding to the weaker economic outlook, the IEA downgraded its 2025 oil demand growth projections to a multi-year low of 740 kb/d, which, in the context of faster OPEC+ supply increases and rising non-OPEC flows, risks a supply glut over the medium term.
This is the central downside risk to oil prices, signaled by weaker oil futures and a spate of downward price revisions by forecasting agencies. Providing some upside potential is the prospect of supply disruptions from more stringent US sanctions on Iran and Venezuela or a de-escalation in the global trade tariff conflict.
Largely unchanged in Q1,benchmark oil prices have dropped precipitously so far in Q2, after President Trump's 'Liberation Day' tariff deluge on US trading partners and OPEC+'s decision to accelerate the pace of its supply cut unwinding schedule. Brent fell to four-year lows in April, shedding 15 percent by the close of the month, the steepest monthly decline since November 2021, and then dropped further to $60.2 earlier in May. The marker has since struggled to break out of the low-to-mid-60s range, though President Trump's decision to slash tariffs on Chinese goods for 90-days did lift prices marginally.
Prices are now ranging around $64/bbl, caught between bearish sentiment linked to unexpected crude inventory builds in the US and a third consecutive month of schedule-busting OPEC+ supply hikes on the one hand, and falling US oil rig counts and pessimism surrounding the prospects for a new Iran nuclear deal that would satisfy both the US and Iran on the other. President Trump's 'maximum pressure' strategy vis-à-vis Iran and threat to impose even more stringent sanctions on the country's energy exports has been one of the few bullish impulses for oil prices and could puncture the negative sentiment that has befallen the oil market in 2025.
The pessimism has also been evident in the formation of a curious anomaly in Brent's forward curve: while the front end of the curve has been 'backwardated'(near-term prices higher than prices in the future), later month prices have shifted into a contango structure that see prices rising over earlier months. This so-called 'smiley' structure is fairly unprecedented and appears to signal that markets believe summer oil demand will be healthy enough to keep prices firm in the short term but insufficient to prevent a surplus and stock builds later on. And this is due to the potent combination of trade-tariff linked macroeconomic weakness and accelerating OPEC+ supply especially.
Meanwhile, the bullish speculator positions that had built up in Q1 quickly reversed in Q2 amid the spike in risk and uncertainty that followed April's tariff onslaught and OPEC+'s accelerated resupply timetable. 'Net length', the difference between the number of 'long' (betting on prices rising) and 'short' contracts (positions staked on prices falling) declined by 155,838 lots w/w in the week-ending 4 April, the sharpest drop in the available data. Net length has recovered slightly more recently as hedge funds view some upside risk in US-Iran nuclear talks failing to progress.
Near-term oil demand growth was revised sharply lower following the escalation of the trade war between the US and China. The International Energy Agency (IEA), taking its cue from the earlier downgrade by the IMF to global GDP growth in 2025 (and beyond), has lowered its forecast for oil demand growth this year to 740 kb/d and 760 kb/d in 2026. This is the weakest rate of growth since pandemic-affected 2020. The IEA pegs total oil demand at 105 mb/d in 2025.
OPEC lowered its demand growth forecast by a less severe 150 kb/d to 1.3 mb/d for both years. OPEC cites higher petrochemical production, solid road and air mobility as well as robust industrial activity in support of its more bullish oil demand growth projection compared to peers. This would also not be incongruous with its recent policy of fast-tracking the unwinding of members' voluntary supply cuts.
Despite broad demand-side worries, OPEC+ surprised the markets by accelerating the pace of unwind of 2.2 mb/d in voluntary output cuts by the 'OPEC-8' (which includes Saudi Arabia, Russia, Iraq, UAE, Kuwait, Kazakhstan, Algeria, and Oman) from 131 kb/d per month from April to 411kb/d in May and then again for both June and July. The move was ostensibly framed as a bid to 'punish' serial quota violators, such as Kazakhstan and Iraq, for failing to cut production in line with their quota obligations and compensatory cut promises. The Saudis hoped the fiscal discomfort of freefalling oil prices would bring about the discipline that has so far been absent among these overproducing members.
Part of the deal was that overproducing members would in good faith compensate for their non-compliance by cutting production according to a mutually agreed timetable thereby offsetting some of the supply that was about to be released. According to OPEC secondary sources, the average aggregate volume of OPEC-8 compensatory cuts required as 'payback' for members' overproduction from January 2024 to March 2025 is 305 kb/d, which would have easily offset the 131 kb/d of monthly incremental production OPEC-8 had originally planned.
This would have resulted in a de-facto output cut. That said, in April, the first month in the schedule that called for higher OPEC-8 supply, monthly supply gains from the group, at 23 kb/d, fell far short of the 131 kb/d that had been planned. Only four of the eight producers – Saudi, the UAE, Oman and Russia – increased production. Despite lowering output in April, Kazakhstan and Iraq were once again producing well above their respective quotas never mind honoring compensatory cut pledges.
Declaration of Cooperation(DOC) production (excluding quota-exempt Iran, Libya, Venezuela and Mexico) fell slightly in April to 30.0 mb/d (-17 kb/d). In the US, crude production hovered near record levels of 13.4 mb/d by mid-May, as per Energy Information Administration (EIA) data. (Chart 6).Following the plunge in oil prices and the downturn in global macroeconomic prospects, the EIA lowered its forecast for US crude oil output growth this year by nearly half to 208kb/d, the slowest rate of expansion since 2021.
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