Oil faces reckoning as OPEC+ supply hike remains a threat

by Alex Longley, Yongchang Chin and Anthony Di Paola

The oil market is racing toward a reckoning as a Saudi-led output surge only adds to expectations of a market that will be in surplus later this year. The crucial question is when?

For months, the biggest news in the market has been OPEC+’s seismic decision to stop supporting oil prices — instead unleashing a flood of barrels. That’s happening just as President Donald Trump’s trade war threatens to sap demand.

While the clock is ticking, there’s been little sign of a price collapse here and now. In fact, oil markets — despite dipping this year — are just about holding up. 

Data from oil major BP Plc — which operates oil refineries from Illinois to Rotterdam — show that the second quarter was the most profitable in over a year from making fuel. Refiners have been busy snapping up cargoes in the US and the North Sea, rushing to turn crude into products like gasoline and jet fuel as demand ramps up in the peak northern-hemisphere summer season. 

“It’s never usually a good idea to short the market on the eve of the seasonal increase in demand,” said Frederic Lasserre, global head of market research and analysis at Gunvor Group, one of the world’s top oil traders. “But after that, the consensus for the fourth quarter and 2026 is quite bearish.”

The global oil market was widely expected to face an oversupply by the end of this year, even before OPEC+’s pivot. The group’s unexpected additions have only added to the chances of an inflection.

The fate of the market matters to oil producing states and central banks in consumer nations alike. A slump would reduce the flow of petrodollars on the one hand while lowering fuel costs on the other, filtering into wider inflation expectations.

In Riyadh, Saudi Arabia is betting the demand increase will give the kingdom leeway to lift its own production and recover market share lost to US shale producers and others outside of the OPEC+ group, people familiar said earlier this month.

Surplus Expected

For months, Wall Street’s expectation has been that demand growth wouldn’t be able to keep pace with a slew of output additions from outside of the OPEC+ alliance this year. 

Strong demand over the winter and into summer — as well as possibly some purchasing for stockpiles — have stalled the reckoning, but still prices in recent years have been high enough to incentivize a wave of new production in a handful of nations, notably in Guyana. Supply has also been at or near records everywhere from Canada to Argentina and China.

Indeed even in the US, where rig counts are plunging to a four-year low, recent data offer another reason for the Saudis to be careful about keeping hold of market share.

America’s total oil production soared to a record in March, with total crude oil and natural gas liquids being revised significantly higher from earlier estimates. That means any eventual declines in US supplies will be coming from historically high levels.

Supply Pressures

The elevated output is starting to come to the fore. For the first time in years, stockpiles showed signs of building when the world’s oil refiners shuttered for seasonal maintenance over the spring. 

Oil storage tanks filled up the fastest pace since 2020 after years of being emptied. 

At the heart of the increase were inventories in the northeastern Chinese province of Shandong — home to the country’s vast array of teapot refineries and a major new strategic reserve — as well as those near new processing plants, according to Kayrros, which monitors stockpiling. Demand in the world’s top importer is also under threat as the fleet of diesel-fueled is steadily replaced by natural gas and battery powered vehicles. 

In contrast to crude, stockpiles of major refined fuels like gasoline and diesel have stayed low, bolstering the incentive to keep buying barrels. 

“Inventories are low, we’re in the seasonal peak demand season now,” said Gary Ross, a veteran oil consultant turned hedge fund manager at Black Gold Investors LLC. “Margins are good and refiners are churning through crude as there is an economic incentive to do that. Inevitably the market is going to be oversupplied later this year, but it’s just a question of everyone getting all hyped up and shorting too early.”

Hockey Stick

The tension between the near-term market and how traders perceive the winter is evident in futures pricing. 

Normally, when there’s robust demand for barrels right now, oil for immediate supply will command a premium.

At the moment, that pattern exists, but — unusually — the market flips into what is known as contango — a much more bearish structure later in the year. 

The signals are fundamental to how traders perceive supply and demand. Its current unusual pattern — something akin to a hockey stick — is on its longest such stretch for at least 17 years. 

Trump Risk

Complicating the path ahead is the risk that Trump could post at any moment about a deal with one or all of Iran, Russia and China, each of which has the potential to send prices soaring or crashing. 

Back in April 2020, a single Trump tweet pushed oil prices higher by about 40% in seconds, making even the most ardent bears think twice before taking positions. 

Just like back then, much will depend on OPEC+’s next moves.

June and July’s exports from OPEC and its allies aren’t likely to match the headline 411,000 barrel a day output figure because of higher domestic use for cooling in the scorching Middle East summer, traders said. Morgan Stanley analysts including Martijn Rats and Charlotte Firkins wrote on Monday that they’re yet to see signs of a surge. 

However, if OPEC+ keeps pushing extra supply beyond summer, then the Middle East nations would be able to export a bigger slice of their output.

“The key question is the return of OPEC+ barrels after various cuts over the preceding three years,” Trafigura Group chief economist Saad Rahim said in the company’s 2025 half-year results report last week. “In the view of OPEC+, the current level of inventories and the marked backwardation indicate that the market needs barrels despite the potential impending slowdown in demand that tariffs might cause.” 

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