Markets Are Unconcerned About Oil Supply

Many oil analysts believe that global oil supplies are tight, but markets don’t agree with them. In fact, markets haven’t indicated any signs of scarcity since the energy shocks that followed Russia’s invasion of Ukraine in early 2022.

I’ve studied versions of the chart below for several years (Figure 1) and initially believed it indicated an investor exodus from oil. However, I now think that interpretation was mistaken. The chart shows a long-term decline in net long positions in oil futures contracts (dark red line) from 2018 to the present. “Net long” represents the difference between long positions (blue) and short positions (orange) held primarily by commercial hedgers and investment funds. Net long positions have decreased by about thirty-three percent compared to their 2017-2021 average.

However, open interest—the total number of outstanding contracts—has only decreased by about sixteen percent. This suggests a modest decline in oil trading activity, but it doesn’t point to a significant withdrawal of investment in oil.

The data indicate that oil markets haven’t echoed analysts’ concerns about supply scarcity since early 2021, even during the Ukraine price shock. In fact, over the past six months, net long positions have dropped to their lowest levels since the depths of the COVID-19 pandemic and the global economic shutdown in early 2020.

Comparative inventory (CI) provides an even clearer picture. Typically, CI correlates inversely with oil prices—when there’s a CI deficit, prices tend to rise, and when there’s a surplus, prices usually fall. However, as shown in Figure 2, the WTI price has dropped even as the CI deficit has grown, indicating an unusual positive correlation. I interpret this as a strong market signal to producers to halt drilling.

Average global liquids production in 2025 is expected to rise by 2 million barrels per day (mmb/d), reaching 104.4 mmb/d, up from the 2024 average of 102.4 mmb/d (Figure 3). A peak output of 105.6 mmb/d is projected for October 2025. If these estimates hold true, the global market could face significant oversupply next year.

Important production increases are expected from the United States, Guyana, Brazil, and Canada, with OPEC+ supposed to begin easing its production cuts.

“Our current balances suggest that even if those [OPEC+] cuts remain in place, global inventories could build by an average 860 kb/d next year as non-OPEC+ supply increases of around 1.5 mb/d in 2024 and again in 2025 more than cover expected demand growth. The Americas quartet of the United States, Guyana, Canada and Brazil account for three-quarters, or roughly 1.1 mb/d, of non-OPEC+ supply gains in each of the two years.”

International Energy Agency

Some analysts have lowered their price forecasts to levels closer to current Brent prices, which are in the low-to-mid $80 range. Even the typically bullish OPEC has recently reduced its demand growth forecast, although it still anticipates a robust 2.1 mb/d increase, well above the pre-COVID-19 historical average of 1.4 mb/d. The U.S. Energy Information Administration predicts an average Brent price of $85 per barrel through the end of 2025 but expects monthly averages to peak as high as $89 in February and March of next year.

Predicting oil supply, demand and price is a tricky business, yet many analysts express their forecasts with certainty, causing some investors to overlook the inherent uncertainties. Markets, however, have an advantage over individual analysts because they reflect a collective aggregation of informed perspectives and data. While this doesn’t guarantee that markets always get it right, they tend to be more objective than the daily stream of opinions from news commentators.

It’s important to recognize that markets are inherently short-sighted. While they excel at assessing near-term profitability, they tend to heavily discount the future, often at the expense of long-term human and planetary well-being.

I’ve consistently argued that the longer-term trend in oil markets points toward increasing supply scarcity. The anticipated surge in production projected by the EIA and IEA is a response to higher oil prices, driven by the heavy hand of OPEC+ export cuts implemented in 2023. However, it now appears increasingly unlikely that these cuts will be relaxed as originally planned, which could extend the period of oversupply.

Correctly interpreting market signals is more of an art than a precise skill, requiring a careful balance of historical data and uncertain projections. These indicators suggest that the oil market is likely to be oversupplied over the next six months.