Oil finds short-term support as oversupply eases, bearish risks linger

The oversupply in the oil market at the beginning of the year is likely to have been sharply lower than previously expected. 

The International Energy Agency (IEA) has revised its outlook for the global oil market, specifically downgrading its prior expectations concerning the magnitude of the supply surplus. 

This adjustment was not a recent development but had already been implemented in the preceding month’s market report. 

Key supply drivers

This significant recalibration suggests that the IEA now anticipates a tighter balance between crude oil production and global demand than previously modeled, reflecting a reassessment of various factors impacting both the supply and consumption sides of the energy equation. 

Since the beginning of 2025, a strong surge in oil supply has driven the current global surplus.

Non-OPEC+ producers have been responsible for nearly 60% of the total 3 million barrels per day increase, IEA said in its January monthly report.

The increase in OPEC+ supply has been spearheaded by Saudi Arabia as production cuts were lifted. 

Concurrently, the rise in non-OPEC+ output has been primarily driven by five American nations: the United States, Canada, Brazil, Guyana, and Argentina.

Global oil supplies are projected to see a further increase of 2.5 million bpd in 2026. 

Agency forecasts, outages, and inventory snapshot

This forecast is contingent on two main factors: that OPEC+ maintains its current production policy, and that there are no significant, sustained disruptions to output, particularly avoiding major downturns in the US shale patch activity.

Combined with the hefty surplus that has built up in storage tanks and at sea over the past year, this would leave the market with a significant buffer well in excess of demand, which is forecast to increase by 930 kb/d in 2026. 

In its December report, IEA had said that demand for 2026 was seen at 860,000 bpd this year. 

Next week, the three energy agencies will present their new forecasts, namely OPEC, IEA and the US Energy Information Administration. 

“In view of the cold weather, they are likely to revise their expectations for global oil demand upwards for the current year, while production expectations are likely to be adjusted downwards due to numerous outages,” Barbara Lambrecht, commodity analyst at Commerzbank AG, said. 

Meanwhile, OPEC’s daily oil production dropped by 230,000 barrels in January compared to December, according to a Bloomberg survey.

This decline was partially attributed to lower output from Venezuela, with Kazakhstan also reporting significant production outages.

On the other hand, due to the recent winter storm, the EIA will probably adjust the US oil production figures for January, revising them slightly downward.

US crude oil inventories dropped by 3.5 million barrels last week, according to EIA’s latest report. 

Gasoline stocks rose by 685,000 barrels, while distillate stocks fell by 5.6 million barrels.

API figures showed a greater crude decline (11.1 million barrels), a larger gasoline increase (4.7 million barrels), and a similar distillate drop (4.8 million barrels).

The inventory data is distorted by the effects of the winter storm, but the impact was less than expected, according to Commerzbank. 

The reduction in US crude oil inventories was limited because domestic production only fell by 480,000 barrels per day last week. 

This modest decline, combined with only a slight dip in crude oil processing and an increase in net crude oil imports, prevented a more substantial decrease in stockpiles.

Analyst assessment and long-term price view

“All in all, the oversupply in the oil market at the beginning of the year is likely to have been significantly lower than previously expected,” Lambrecht said. 

As energy organisations downgrade their expectations regarding oversupply this year, oil prices could get some temporary support, according to Lambrecht. 

“However, we fundamentally stand by our assessment that oversupply will cause prices to fall over the course of the year,” Lambrecht added. 

After all, the production outages are only temporary and OPEC+ is likely to further increase production from April onwards.

At the time of writing, the price of West Texas Intermediate crude oil was at $63.24 per barrel, largely flat, while Brent was at $67.53 per barrel, also unchanged from the previous close. 

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