Oil price smile could leave traders in tears
Major energy forecasting agencies, banks and producers expect oil supplies to far outstrip demand through the coming months and well into 2026 due to both an expected slowdown in demand growth and sharp production increases from OPEC+ and other major producers including the United States, Canada, Brazil and Argentina.
The International Energy Agency projects global oil production will climb by 2.5 million barrels per day to 105.5 million bpd in 2025, then by another 1.9 million bpd in 2026, with a whopping 4.1 million bpd jump expected for Q1 2026.
And the U.S. Energy Information Administration also expects sizable stock builds this year and next.
Meanwhile, global consumption is expected to be only 103.74 million bpd this year and 104.44 million bpd next year.
In response, spot Brent crude prices have already softened, sliding from over $73 a barrel on July 30 to just under $66 this week, also reflecting the waning summer oil demand in the northern hemisphere.
But the longer end of the futures curve is telling a different story.
In the oil market – as in other big commodity spaces – participants can buy contracts for future delivery months or years ahead, letting producers, refiners, consumers and speculators either hedge or bet on price moves.
The forward curve reflects those expectations and comes in two flavours. Backwardation – when prompt prices sit above future prices – usually signals a tightening market and nudges producers to pump more. And contango – future prices above prompt levels – normally points to oversupply, incentivizing storage over drilling activity.
Given that a chorus of experts is calling for significant oversupply in today's oil patch, you'd expect Brent's forward curve to be steeply in contango through 2026.
Instead, it's in pronounced backwardation from the prompt October contract out to March 2026, then largely flat to September 2026 before swinging into strong contango. The result: a forward curve 'smile'.
That shape is rare and puzzling. If a sizeable overhang is indeed barrelling down on the market, traders would very likely need to store more crude in tanks or, in a pinch, even on ships in the coming months.
This means that a strong price correction may be coming.
What could be driving this mismatch between prices and forecasts?
One explanation could be that investors expect OPEC+ to step in if necessary.
The group, which includes the Organization of the Petroleum Exporting Countries, Russia and other producers, has sharply increased output since April when it started unwinding 2.2 million bpd of supply cuts, part of a series of cuts introduced since 2022 to prop up prices.
The move, led by OPEC's de-facto leader Saudi Arabia, was aimed at re-establishing cohesion within the group after several members exceeded production quotas.
Riyadh's push to pump more crude also appears to be aimed at increasing its own production share in the global market by squeezing higher-cost producers around the world, such as U.S. shale producers.
So even though OPEC+ could reintroduce cuts in the fourth quarter to head off a swelling glut, that belief seems like quite a stretch.
First, members that have ploughed capital into new capacity in recent months may balk at having to quickly reverse course. New cuts would also undercut Saudi efforts to claw back market share. And slashing supply risks lifting prices, precisely what U.S. President Donald Trump has urged OPEC to avoid.
Maybe geopolitical confusion explains the smile as investors are struggling to price Trump's trade wars and the sprawl of on-and-off tariffs that – at some point – are likely to sap manufacturing and trade flows, clipping oil demand at the margins.
Meanwhile, investors also have to factor in the potential tightening of U.S. and European Union sanctions on Russia and Iran, which could further complicate supply chains. Trump's threat of secondary sanctions on buyers of Russian crude – particularly China and India – could certainly scramble global trade.
And yet, geopolitical jitters are hardly new to oil markets, and they certainly can't fully explain the curve's grin.
Finally, it could simply be that traders don't believe the market forecasts.
But even if that's the case, the stubborn disconnect should make them nervous, particularly given all the unknowns.
If the IEA's overhang materializes, the math argues for inventory builds and a forward curve tipping into contango. So traders need to watch out. This deepening smile could well end in tears.
Enjoying this column? Check out Reuters Open Interest (ROI),, opens new tabyour essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis. Markets are moving faster than ever. ROI, opens new tab can help you keep up. Follow ROI on LinkedIn, opens new tab and X., opens new tab
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Reuters
a few seconds ago
- Reuters
Oil rises 1% on stalled Russia-Ukraine peace talks, strong US demand
NEW YORK/LONDON, Aug 21 (Reuters) - Oil prices rose by nearly a dollar a barrel on Thursday as Russia and Ukraine blamed each other for a stalled peace process, and as earlier U.S. data showed signs of strong demand in the top oil consuming nation. Brent crude futures were up 85 cents, or about 1.3%, at $67.69 a barrel at 1:42 p.m. EDT (1742 GMT), having hit a two-week high earlier in the session. U.S. West Texas Intermediate crude futures were up 86 cents, or 1.4%, at $63.57 a barrel. Both contracts climbed more than 1% in the prior session. The path to peace in Ukraine remained uncertain, turning oil traders cautious after a selloff over the past two weeks on hopes that U.S. President Donald Trump would soon negotiate a diplomatic end to Russia's war with its neighbor. Both Moscow and Kyiv have since blamed each other for stalling the peace process. Russia on Thursday launched a major air attack near Ukraine's border with the European Union, while Ukraine claimed to have hit a Russian oil refinery. "Some geopolitical risk premium is slowly being pumped back into the market," oil trading advisory firm Ritterbusch and Associates told clients on Thursday. The uncertainty in the peace talks means that the possibility of tighter sanctions on Russia has resurfaced, said Tamas Varga, an analyst at PVM Oil Associates. Oil prices were also supported by a larger-than-expected drawdown from U.S. crude stockpiles in the last week, indicating strong demand. U.S. crude stockpiles fell 6 million barrels in the week ended August 15, the U.S. Energy Information Administration reported on Wednesday, while analysts had expected a draw of 1.8 million barrels. "These tight domestic stockpiles stand in contrast to the oversupply outlook projected by both the IEA and EIA for 2026, challenging traders' broader market expectations," StoneX analyst Alex Hodes told clients. Investors were also looking to the Jackson Hole economic conference in Wyoming for signals on a possible Fed interest rate cut next month. The annual gathering of central bankers begins on Thursday, with Fed Chair Jerome Powell scheduled to speak on Friday.
Reuters
a few seconds ago
- Reuters
Strong market debuts raise questions over cautious IPO pricing by Wall St banks
Aug 21 (Reuters) - Big first-day gains by recent high-profile U.S. listings have raised questions over whether Wall Street banks — wary of volatility and economic uncertainty from sweeping U.S. tariffs — are pricing them too cautiously, benefiting investors but causing issuers to miss out. The 20 biggest U.S. IPOs this year — among them software maker Figma (FIG.N), opens new tab and stablecoin issuer Circle (CRCL.N), opens new tab — averaged a first-day pop of 36%, a Reuters calculations using data compiled by LSEG showed. That was much higher than the 15% to 20% rise that analysts considered the sweet spot, enough to reward investors for taking the risk without underpricing the offering. If the 20 listings were priced closer to this range, it could have netted the companies $6.1 billion more in proceeds, a separate analysis of Dealogic data showed. Banks are often accused of underpricing IPOs to avoid embarrassing flops. But underwriters are more cautious because IPOs on hold for years due to higher interest rates are looking to debut amid tariff worries and choppy retail demand, according to four analysts, two venture capital executives and two industry experts. "In today's market, conservative IPO pricing is a strategic choice designed to build positive momentum and long-term brand equity (for issuers)," said Lukas Muehlbauer, research analyst at IPO research firm IPOX. A solid debut also makes it easier for companies to tap follow-up capital, he said. Shares of Figma popped 250% and Circle 168% in their debuts. Crypto exchange Bullish (BLSH.N), opens new tab closed its first session nearly 84% above the IPO price. The companies and their lead underwriters either declined to comment or did not respond to requests seeking comment. Market turmoil sparked by Trump's global trade war soured the chances of a blockbuster first quarter for deals, but optimism over his deregulatory policies and expectations of interest-rates cuts have helped the S&P 500 (.SPX), opens new tab hit new records, reviving the IPO market. While modest pricing may draw investors in choppy markets, critics said it would be at the expense of issuers, who may raise less capital. "IPO pops are a reminder that the process remains broken," said Phil Haslett, co-founder of EquityZen, one of the largest pre-IPO stock platforms. "The traditional roadshow is designed to secure commitments from institutional investors, largely failing to account for what we see as significant levels of retail investor demand." That blind spot leaves banks guessing how retail buyers will respond on day one, increasing the chances of sharp trading swings. However, some fintech brokerages such as Robinhood (HOOD.O), opens new tab and SoFi Technologies (SOFI.O), opens new tab are tapping retail demand by offering access to IPO shares in select companies. "The IPO market's basically been closed for three years. So if you're an investment banker, you don't know what the demand is," said Tomasz Tunguz, founder of venture capital firm Theory Ventures. As listings rise, startups preparing to go public may push back against conservative pricing, Tunguz said. The fall IPO window is shaping up to be one of the busiest in years, with fintech giant Klarna, crypto exchange Gemini and medtech firm Medline leading the race to capitalize on resurgent investor demand before the end of the year. The Renaissance IPO Index (.FTIPOUSA), opens new tab, which tracks the performance of some of the largest newly listed stocks, has risen 15% in 2025, outpacing the benchmark S&P 500 (.SPX), opens new tab. For years, critics of the IPO process have promoted direct listings — where issuers go public by putting shares directly on to a stock exchange without the help of underwriters — to avoid misjudging demand. This route was taken by streaming platform Spotify (SPOT.N), opens new tab and crypto exchange Coinbase (COIN.O), opens new tab in recent years. But it has gained limited traction in the U.S. as companies prefer the stability of the traditional IPO roadshow and the trading support provided by underwriters. "The traditional IPO path is just more tried and tested, and more people understand it than a direct listing," said Mike Bellin, IPO services leader at PwC U.S. Special purpose acquisition companies or SPACs, where a listed shell merges with a private firm, were touted as an alternative to traditional IPOs, but went through a boom-and-bust cycle between 2020 and 2022. Though the route is regaining ground this year, mainly among high-growth crypto and tech stocks, it remains constrained by regulatory hurdles, redemption risks and stock volatility. "If I were IPO-ing my company right now, I probably would do it the way that people have been doing it, even if I know there's a mispricing risk," said Maria Palma, general partner at Freestyle Capital.
The Guardian
31 minutes ago
- The Guardian
Trump officials urge Fed to remove governor after she refuses to quit
The Trump administration is ratcheting up pressure on the Federal Reserve to remove governor Lisa Cook, after the economist declared she had 'no intention of being bullied' into stepping down. Cook, who was appointed to the US central bank's powerful board of governors by Joe Biden, has been accused by Donald Trump's officials of committing mortgage fraud. The allegations are unconfirmed. The US president has waged an extraordinary war on the Fed's independence, breaking with precedent to demand interest rate cuts and urge its chair Jerome Powell to resign. Trump promptly called on Cook quit on Wednesday. The Department of Justice is reported to have indicated it is investigating the allegations, with a top Trump official telling Powell the case 'requires further examination' – and calling on him to remove Cook from the Fed's board. 'At this time, I encourage you to remove Ms. Cook from your Board,' Ed Martin, the official, wrote in a letter, according to Bloomberg News. 'Do it today before it is too late! After all, no American thinks it is appropriate that she serve during this time with a cloud hanging over her.' The Fed declined to comment. The justice department did not immediately respond to a request for comment. Despite Martin's demand, the Fed chair has not authority under the Federal Reserve Act to remove another member of the Board of Governors. On Wednesday The Wall Street Journal reported that Trump had discussed how to fire Cook for cause, citing an unnamed administration official. The White House did not respond to a request for comment on the report. On Wednesday morning, Bill Pulte, head of the US Federal Housing Finance Agency, who has become – beyond the president himself – one of the Trump administration's most vocal critics of Powell and the Fed, published allegations against Cook. In June 2021, Cook entered into a 15-year mortgage agreement on a property in Ann Arbor, Michigan, and declared her intention to use it as her principal residence, according to Pulte. In July 2021, Cook bought a property in Atlanta, Georgia, and also committed to use that property as her primary residence when taking out a 30-year mortgage, according to Pulte. In a statement, Cook said: 'I do intend to take any questions about my financial history seriously as a member of the Federal Reserve and so I am gathering the accurate information to answer any legitimate questions and provide the facts.' She is the latest figure to be targeted by Trump officials over claims of mortgage fraud. Pulte has made similar allegations about the New York attorney general, Letitia James, and the California senator Adam Schiff, both Democrats. The justice department is reportedly investigating. James has dismissed the claims as 'baseless', while Schiff has vehemently denied the allegations, and accused the administration of weaponizing the US justice system.
