Oil Prices Head Towards Largest Annual Loss Since the COVID-19 Pandemic

SadaNews - Oil is on track to record its largest annual loss since the COVID-19 pandemic in 2020, as prices face pressure from fears of a significant oversupply that could dominate market sentiment and trading as the new year approaches.

Brent crude for March delivery traded near $61 a barrel, while more active prices are headed towards a fifth consecutive monthly loss, down nearly a fifth this year.

West Texas Intermediate crude was traded below $58 a barrel. Traders are focused on an upcoming meeting for the OPEC+ alliance and a negative U.S. report from the industrial sector, along with a series of geopolitical tensions.

Oversupply Pressures Prices

Oil prices have declined this year amid increased supplies from the OPEC+ alliance and non-OPEC producers, at a time when demand growth has slowed.

Several institutions, including the International Energy Agency, anticipate a massive oversupply in the market next year, while the OPEC secretariat maintains an optimistic outlook, expecting a modest surplus. In the longer term, low prices could push drilling companies to curtail investments, which may pave the way for a later recovery in prices.

Charu Chanana, Chief Investment Strategist at Saxo Markets in Singapore, said: "The real story for us, alongside the narrative of oversupply at the beginning of 2026, is that deferring investments now increases the chances of a sharp and disorderly oil price spike later on.”

She added, "The oil market starts 2026 with a split personality between short-term comfort and long-term worry,” referring to the accumulation of stocks in the near term against the potential for a supply gap later on.

Anticipation of OPEC+ Meeting and Inventory Data

OPEC+ members are scheduled to hold a virtual meeting on January 4, and it is expected to adhere to a plan to freeze any additional increases in supply, amid mounting evidence of an oversupply in the market, according to three delegates.

Before that, the American Petroleum Institute reported that crude inventories rose by 1.7 million barrels last week. If this data is confirmed in the official numbers expected later on Wednesday, it will be the biggest increase since mid-November. The institute also noted a rise in gasoline and distillate inventories.

Geopolitical Tensions Add Uncertainty

Regarding geopolitical tensions, the UAE, which is a key member of OPEC+ alongside Saudi Arabia, announced that it would withdraw its troops from Yemen following heightened tensions over military operations in the war-torn country.

In another context, traders are monitoring a partial U.S. blockade on oil shipments from Venezuela. President Donald Trump had revealed a covert U.S. strike targeting what he said was a drug smuggling facility, raising new questions about how far Washington is willing to go in pressuring President Nicolas Maduro's regime.

U.S. efforts to end the war in Ukraine have also been under scrutiny. Kremlin spokesperson Dmitry Peskov confirmed on Tuesday that Russia will toughen its negotiating stance following an alleged attack on a presidential residence, a charge rejected by Ukrainian President Volodymyr Zelensky.

Dual Impact on Inflation and Producers

The drop in oil prices has helped alleviate inflationary pressures, which is a supportive factor for monetary policymakers seeking to contain rising prices. The U.S. Federal Reserve has cut interest rates three times in 2025, and minutes from its recent meeting showed that most officials see room for further cuts.

In contrast, this decline has posed a challenge for producers, including OPEC+ countries that rely on oil revenues to finance their spending. Saudi Arabia had earlier projected a budget deficit of approximately 5.3% of GDP, more than double the previous estimate.

Trading on Wednesday witnessed limited activity as a large number of traders were absent. Most financial markets, including the oil market, are set to close on Thursday in observance of New Year's holiday.