The global oil market is bracing for what the International Energy Agency (IEA) warns could be the biggest supply glut since the pandemic, with crude inventories projected to swell through late 2025 and early 2026.
On Thursday, Brent crude futures were close to a two-week high and up 43 cents, or around 0.6 per cent, at $67.27 a barrel at 1203 GMT. US West Texas Intermediate (WTI) crude futures were up 45 cents, or 0.7 per cent, at $63.16 a barrel. Both contracts climbed over 1 per cent in the prior session.
The draw signals resilient demand, yet gains remain limited as geopolitical tensions cloud the outlook.
Energy traders weigh the prospect of shifting global supply flows, including stronger Russian exports and higher Opec+ output, which have pressured crude to a three-month low, down over 10 per cent this month.
Demand growth continues to underperform expectations, while production — both from Opec+ and non-Opec+ suppliers — is surging to multi-year highs.
In its August oil market report, the IEA once again cut demand growth forecasts, marking the sixth downgrade this year. Global oil demand is now expected to rise by just 680,000 barrels per day (bpd) in 2025 and by 700,000 bpd in 2026. Since the start of the year, the agency has lowered its growth outlook by a combined 350,000 bpd. Weak consumption across major economies and softer-than-expected demand from emerging markets such as China, Brazil, Egypt and India underpin the downward revisions. While jet fuel demand is enjoying a summer boost of over 2 per cent in the US and Europe, it has not been sufficient to offset wider demand weakness.
At the same time, global supply is on the rise. The IEA has lifted its projection for supply growth this year to 2.5 million bpd, an upward revision of 370,000 bpd from July. The eight Opec+ members, including Saudi Arabia, Russia, the UAE and Iraq, agreed earlier this month to add 547,000 bpd in September, fully unwinding the 2.2 million bpd in cuts first introduced in November 2023. By the end of September, the entire cutback programme will be rolled back.
Yet the bulk of new barrels are expected from non-Opec+ producers. The US, Brazil, Canada and Guyana are all lifting production, with American natural gas liquids (NGLs) and offshore fields in South America and the Atlantic basin leading the growth. Non-Opec+ supply is expected to rise by 1.3 million bpd in 2025 and a further 1 million bpd in 2026. According to the IEA, Brazil will surpass the US as the single largest contributor to non-Opec+ growth in 2026, with an increase of 160,000 bpd compared to America’s 130,000 bpd.
The mismatch between supply and demand is beginning to show in inventories. Global observed oil stocks increased by 1.5 million bpd in the second quarter, with Chinese crude inventories swelling by 900,000 bpd and US gas liquids adding another 900,000 bpd. The IEA forecasts that inventories will build at a record pace of nearly 3 million bpd next year — surpassing even the glut of 2020, when the Covid-19 pandemic crushed demand. Saxo Bank strategist Ole Hansen described the outlook as “the most bloated market balances in years.”
The US Energy Information Administration (EIA) shares this view. In its latest short-term outlook, the EIA projected inventory builds averaging more than 2 million bpd in the fourth quarter of 2025 and the first quarter of 2026, up 800,000 bpd from last month’s forecast. Reflecting the weaker balance, the EIA cut its Brent crude price forecast for 2026 to $51 per barrel, down from $58 previously. It expects low prices to eventually force supply adjustments from both Opec+ and some non-Opec producers by mid-2026.
The divide between the IEA and Opec on demand outlooks remains stark. The IEA expects global demand in 2026 to reach just 104.4 million bpd, while Opec forecasts consumption of 106.5 million bpd. For this year, Opec has kept its estimate unchanged at 1.29 million bpd in demand growth, nearly double the IEA’s forecast. The cartel also sees non-Opec supply growth at just 800,000 bpd in 2025 and 600,000 bpd in 2026, well below the IEA’s projections. This divergence underscores the uncertainty hanging over the market: Opec paints a more bullish picture of resilient consumption and tighter balances, while the IEA is firmly bearish.
Adding to the bearish sentiment, geopolitical developments are weighing on market psychology.
Oil prices fell by nearly a dollar on Friday, with Brent closing at $65.85 and West Texas Intermediate at $62.80, ahead of the Alaska summit between US President Donald Trump and Russian President Vladimir Putin. Trump said the two leaders agreed to push directly for a peace settlement in Ukraine rather than a temporary ceasefire, signalling that Russian oil exports would continue largely undisturbed. He also indicated that sanctions on countries buying Russian oil, including China and India, would be held off for now. Analysts noted that uninterrupted Russian flows are bearish for prices, though markets may see only a limited near-term reaction until further clarity emerges from follow-up talks in Washington with Ukrainian President Volodymyr Zelenskiy and European leaders.
Despite the looming supply glut, crude prices have not yet fully reflected the weaker fundamentals. Stocks at pricing hubs remain below historical averages, while record refinery runs this summer helped absorb extra barrels. Traders are cautious, with many awaiting signals on sanctions policy and geopolitical negotiations before adjusting positions.
Market watchers are of the view that overall outlook for oil markets remains fragile. Demand is stagnating, supply is accelerating, and inventories are swelling at rates not seen since the pandemic. Unless demand surprises on the upside or Opec+ undertakes fresh coordinated cuts, the imbalance could persist deep into 2026, they argued.
Prices are likely to remain under pressure, testing the ability of producers — particularly those with higher costs — to weather an extended period of subdued revenues. For consuming nations, however, the prospect of lower energy prices could provide some relief at a time of sluggish global economic growth, they said.
Source: Khaleej Times