Markets Scramble to Assess the Size of the Oil Glut
The oil market has been on edge for months, bracing for a significant oversupply. Forecasters, investment banks, and analysts predict that this surplus will depress oil prices by the end of this year and into early next year, as inventory builds become more apparent at key pricing hubs. The consensus is clear: a glut is imminent and will soon overwhelm the market.
However, estimates of the glut's magnitude vary widely, ranging from a massive, record-breaking surplus to more modest inventory increases during the typically weaker demand period in the first quarter of any year. If the oil market were a simple supply and demand equation, assessing the glut's size would be straightforward. But the market is far from simple, and the estimates are more like educated guesses filled with 'ifs' and 'what ifs'.
Despite the uncertainty, there are clear signs of a glut.
The International Energy Agency (IEA) issued a warning in its October monthly report, stating that the expected global oil oversupply would be larger than previously thought, given soaring supply and subdued demand. In September, Middle East supply surged, combined with robust flows from the Americas, resulting in a massive 102 million barrels of oil, equivalent to 3.4 million bpd, the largest increase since the pandemic. The IEA predicts that as crude oil moves onshore to major hubs, stocks will surge while NGLs drop.
However, a week after the IEA's report, US sanctions on Russia's top oil producers and exporters, Rosneft and Lukoil, cast doubt on the accuracy of these estimates. The sanctions, which are part of the Trump Administration's strategy to pressure Russia into peace talks in Ukraine, may not be fully implemented after November 21. This uncertainty complicates the assessment of the glut's size.
Daan Struyven, Head of Oil Research at Goldman Sachs, noted that Rosneft and Lukoil have been exporting 3 million barrels per day (bpd) of oil, or about 3% of global supply, this year. However, Goldman expects the impact to be more limited to global oil imports, as the core OPEC has spare capacity to offset some of the shortfall. Moreover, trade networks often reorganize in the aftermath of sanctions.
Goldman remains bearish on oil prices in the near term due to significant inventory builds in recent months. Additionally, some investors may have inferred that the US administration might escalate and then de-escalate, which adds to the uncertainty. Despite the sanctions, global trade flows have shifted as Russia's key buyers, China and India, seek alternative supplies or purchase Russian oil through non-sanctioned entities.
Chinese state-owned oil giants have reportedly suspended purchases of Russian oil in the short term, while independent refiners are likely to continue seeking Russian crude, albeit more cautiously. Indian refiners are even more cautious, especially as they aim to reduce their massive 50% tariff on exports to the US. The World Bank forecasts that the oil glut has expanded significantly in 2025 and is expected to rise next year, reaching 65% above the 2020 high.
With slowing oil demand growth due to EV sales and stagnating consumption in China, the World Bank predicts that Brent crude oil prices will fall from an average of $68 this year to $60 next year, a five-year low. The OPEC+ producers' decision to pause their production cuts in the first quarter of 2026 is a strategic move to prevent a price slump if inventory builds accelerate. This pause also gives OPEC and its allies, led by Russia, time to assess the impact of US sanctions on Russian producers and whether the market will reshuffle to accommodate changed trade flows.
Despite these developments, OPEC and its key members publicly dismiss the glut narrative. The United Arab Emirates' Energy Minister, Suhail Al Mazrouei, stated that the UAE does not expect oversupply in the oil market, as demand remains solid. However, the pause in production hikes is a strategic move to prevent a price slump, indicating that OPEC+ is aware of the potential glut and is taking proactive measures.
