Daily excess supply of 3 million barrels cannot break oil prices? Analyst: Geopolitical risk premium + demand exceeding expectations are taking over the market.

When entering the year 2026, the consensus among oil analysts is that the oil market is entering a period of deep oversupply, which may continue to suppress prices throughout the year. In 2025, as oversupply intensified, oil prices fell by about 20%. However, this year, due to the dual impact of geopolitical shocks and stronger than expected demand, oil prices unexpectedly rose. Currently, oil prices are higher than they were six months ago, with Goldman Sachs strategy analysts writing in a report to clients that this has led traders to "focus on why a global large-scale oversupply... has not yet translated into continuous decline in Brent oil prices so far in 2026". However, analysts note that these two indicators do not necessarily have to change simultaneously. "My thought is that these two things... they could coexist," said Jorge Leon, geopolitical analysis director at Rystad Energy. Since the beginning of the year, international benchmark Brent crude oil futures have risen by about 15%, while WTI crude oil futures have slightly less, at 14%. As of January, the International Energy Agency (IEA) estimated that the oil market would be oversupplied by about 3.7 million barrels per day, which Macquarie analysts called "extreme oversupply" in a recent client report. The Organization of the Petroleum Exporting Countries (OPEC+) was mostly cancelling production cut measures in 2025. In the Americas, U.S. shale oil production remained at record levels, with production in other export countries in the region also increasing. As the world shifts towards electrification and other forms of green energy, global demand for hydrocarbons is expected to generally decrease. But due to traders incorporating various unexpected supply constraint factors and upward revisions in demand forecasts, oil prices have still risen. Sanctions by the U.S. Treasury on Russia's two major oil producers, Rosneft and Lukoil, appear to have reduced daily supply by about 600,000 barrels; meanwhile, exports from the Caspian Pipeline Consortium (CPC) pipeline between the Caspian and Black Seas have decreased by about 440,000 barrels per day following drone attacks on the pipeline's export terminal on the Black Sea coast, to at least the lowest level in seven years. Meanwhile, the likelihood of U.S. military action against Iran is increasing, causing oil prices to soar due to the potential interruption of the critical global chokepoint of the Strait of Hormuz, through which about 20 million barrels of oil products pass daily. Attacks on commercial shipping in the Red Sea have forced oil tankers to detour around the Cape of Good Hope in Africa, tightening physical delivery markets and increasing transportation costs for oil products between Europe and Asia. Demand also remains stronger than expected. Slowdown in manufacturing data in Europe was seen as a bearish signal for prices, but stronger than expected transportation data, demand growth in other regions of the world, and unexpected cold weather offset this impact. With China extending its buying spree, it is expected that China will soon bring online more storage capacity. Meanwhile, January's U.S. employment data far exceeded expectations, which is another bullish signal for demand, and production by the OPEC+ oil-producing country alliance remains below guidance as member countries' output is below allowed levels. Overall, the International Energy Agency (IEA) recently raised its 2026 demand forecast by about 100,000 to 200,000 barrels per day in January, while reporting a 1.2 million barrel per day decrease in global supply compared to the previous month. All of this is not enough to alleviate the oversupply situation, and the general consensus in the market is still a surplus of at least 2 to 3 million barrels per day. Goldman Sachs maintains its price target of $56 per barrel for Brent crude oil in 2026, which implies a drop of over 20% from current levels, while Rystad Energy estimates the "fair value" of a barrel of oil at $61 based on supply and demand fundamentals. But the combination of escalating geopolitical tensions and stronger than expected demand has supported oil prices at least in the short term. "We still believe that the market will experience a serious oversupply," said Leon from Rystad. But if geopolitical risks continue to rise, "even with oversupply, you may still see high oil prices."