A Massive Oil Surplus Looms as Crude Prices Struggle Under Multiple Headwinds

Energy markets faced mounting pressure on January futures trading, with WTI crude oil sliding 0.57 points (-0.97%) and RBOB gasoline dropping 0.0062 (-0.34%). Both commodities extended their recent declines, hitting their lowest levels in 1.5 weeks and 2 weeks respectively. The culprit? A combination of currency strength and rising worries about an oversupply situation in global energy markets.

The Oversupply Concern Takes Center Stage

The primary headwind for crude traders is the looming supply glut. Trafigura, one of the world’s largest commodities traders, warned that a “massive glut” is building for next year as new production comes online while demand growth remains muted. This forecast has spooked the market, creating a bearish narrative that’s difficult for prices to overcome.

The impact shows up in the crack spread—a key metric tracking refining margins. This spread recently hit a 6-week low, signaling that refiners find it less attractive to process crude oil into finished products like gasoline and diesel. When refiners pull back, it directly reduces demand for crude barrels.

Evidence of weakened energy demand also appeared in Saudi Arabia’s move last Thursday. Aramco, the state oil producer, cut its Arab Light crude pricing for Asian customers by 30 cents per barrel for January delivery—the lowest since January 2021. Such aggressive pricing moves typically signal producers scrambling to maintain sales volume in a softening market.

Geopolitical Risks Provide Limited Support

While crude bears dominate the narrative, certain geopolitical tensions are offering some price support. Russian energy sanctions remain in place with no clear resolution timeline for the Ukraine conflict. Over the past three months, Ukrainian forces have targeted at least 28 Russian refineries, constraining Moscow’s refining capacity and crude export capabilities. Additionally, drone strikes recently damaged a Russian Baltic Sea oil terminal, forcing temporary closure.

Kazakhstan’s crude export route also faced disruption when the Caspian Pipeline Consortium, which handles 1.6 million barrels per day, was forced to shut down following damage to infrastructure at one of its moorings. These supply constraints from Western sanctions and military actions limit how much crude can leave the region, providing a floor under prices.

Tensions in other regions also captured attention. President Trump’s comments about potentially targeting drug cartels within Venezuela—the world’s 12th-largest oil producer—added another geopolitical layer to the energy outlook.

OPEC+ Pauses Production Increases Amid the Glut Threat

In response to the emerging supply surplus, OPEC+ signaled restraint on November 30, announcing plans to pause production increases during Q1 2026. While the cartel approved a modest 137,000 barrel-per-day increase for December, members will halt further hikes as the global surplus materializes.

The International Energy Agency had already flagged this risk in mid-October, forecasting a record global oil surplus of 4.0 million barrels per day for 2026. OPEC+ is attempting to restore its full 2.2 million bpd production cut from early 2024, but still faces another 1.2 million bpd left to bring back online—a delicate balancing act in an oversupplied environment.

OPEC’s November crude output fell slightly by 10,000 bpd to 29.09 million bpd, while the organization revised its Q3 market estimates from a deficit to a 500,000 bpd surplus as US production exceeded expectations.

US Production Momentum and Inventory Levels

The EIA recently raised its 2025 US crude production forecast to 13.59 million barrels per day from 13.53 million bpd the previous month. Current production stood at 13.815 million bpd in late November, slightly below the record of 13.862 million bpd set just weeks earlier.

However, US crude inventories tell a different story. As of late November, crude stockpiles sat 3.0% below the seasonal 5-year average, while gasoline inventories were 3.1% below normal and distillate stocks were 7.6% below average levels. Crude stored on stationary tankers also declined, falling 7.9% week-over-week to 121.23 million barrels in early December.

The Oil Rig Count Signals Mixed Signals

Baker Hughes data from early December showed US oil rig activity rising by 6 to 413 rigs, a recovery from the 4-year low of 407 seen just days prior. Still, the broader trend remains firmly downward—rigs have plummeted from a 5.5-year high of 627 in December 2022, underscoring industry caution about oversupply risks ahead.

The convergence of these factors—the anticipated supply glut, muted demand, currency headwinds, and reduced refining margins—creates a challenging environment for crude bulls. While geopolitical tensions and sanctions provide some support, they appear insufficient to offset the mounting supply concerns expected to intensify through 2026.