Crude oil markets have turned out to be tighter than most analysts appeared to expect, and are ready to absorb OPEC+’s higher-than-forecast supply boost next month. For proof, look no further than oil prices after the latest OPEC+ announcement that took traders and analysts by surprise.
On Monday, after OPEC+ said it would add more than half a million barrels daily to its combined output, Brent crude was trading at around $68 per barrel. Later in the week, it spiked to over $70 per barrel before retreating to end the week with a modest gain. By all accounts, oil prices should have fallen after OPEC+ said it would be returning more barrels to the market. Yet they did not. They rose, revealing, once again, a divorce between market perceptions and physical realities.
“You can see that even with the increase in several months, we haven’t seen a major buildup in the inventories, which means the market needed those barrels,” said the energy minister of the United Arab Emirates, Suhail al Mazrouei, on Wednesday during OPEC’s seminar in Vienna, as quoted by Bloomberg.
Indeed, global oil inventories are not exactly bursting at the seams, according to none other than the International Energy Agency. In its June oil market report, the IEA said that while non-OECD crude oil inventories had gained earlier in the year, inventories in the OECD were 97 million barrels below their level from the same time last year, driving total global inventories down.
There is also the matter of demand, which is currently in its peak season in the northern hemisphere—and there is a risk of fuel shortages. More specifically, the market could swing into a diesel shortage, the Wall Street Journal reported this week, citing analysts. The reason for the shortage, to be fair, is not so much crude oil prices but low refining margins. Yet it has to do with demand, which so many presumably reputable sources insist is weakening.
“Because of those run cuts, we started this year with not enough diesel in storage, and saw increased demand because of the cold winter,” Sparta Commodities analyst James Noel-Beswick told the WSJ, referring to refiners’ decisions to reduce run rates in response to the lower refining margins in late 2024.
“I think they’re going to be a little bit behind the curve, and there’s some catching up to do,” Dennis Kissler, BOK Financial senior vice president of trading, told the publication. When inventories recover, “I think it’s going to be at higher prices.”
It seems, then, that OPEC is not just talking up its own book when it says oil markets are tight. If the OECD inventory situation is not proof enough, U.S. inventories at Cushing, Oklahoma, are at the lowest in 11 years, per Bloomberg, and U.S. diesel inventories are a solid 23% below the five-year average for this time of the year.
The tightness of oil supply globally was highlighted on several occasions earlier in the year as well, with the flare-ups in Middle Eastern violence. Each flare-up automatically led to spikes in prices even though no oil fields or infrastructure have been targeted by any party involved. Had the market been as oversupplied as many claimed, only a direct missile hit on an oil field would have led to price spikes, although some noted that the oil price spike would have been more pronounced had the market been tighter.
Still, many commodity analysts are holding on to the view of a potential surplus later in the year. That is at least some change from earlier forecasts that said the market was already oversupplied and OPEC+ was only going to make a bad supply situation worse. Now, forecasts are being revised in recognition of physical realities, but still expect a surplus.
ING commodity analysts, for instance, wrote this week that OPEC’s supply boost was expected, reiterated its prediction that it would agree to one more boost for September, and then take a break. “These increases should move the global market into a large surplus in the fourth quarter, intensifying downward pressure on prices. For now, though, the market remains relatively tight through the northern hemisphere summer,” Warren Patterson and Ewa Manthey wrote.
OPEC, meanwhile, revised its demand outlook for oil, lowering the 2026 projection to 106.3 million barrels daily from 108 million bpd that it exapected last year. The reason: slowing Chinese demand growth. That would be the same slowing demand growth that every analyst has been noting as a driver of demand weakening and eventual destruction.
“Right now, if you look out the window, the market is pretty tight,” Rapidan Energy Group’s Bob McNally told Bloomberg, adding that the balance between demand and supply would begin changing after peak demand season ends—which will coincide with the end of OPEC+’s unwinding of production cuts.
By Irina Slav for Oilprice.com
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