After the Shocks and Fluctuations of 2025.. Where Are Oil Markets Heading in 2026?

SadaNews - After a year marked by sharp fluctuations and rapid reactions amidst geopolitical events and tariffs, the oil market in the new year is gradually heading towards a supply surplus, according to Bob McNally, President of Rapidan Energy.

McNally stated that oil prices fell sharply in Trump's first year as President of the United States from $85 per barrel to around $62, and that oil markets ended the year returning to fundamental pricing, after the intensity of political shocks and geopolitical tensions that temporarily influenced prices subsided.

Brent crude for March delivery fell 0.1% to $61.25 per barrel at 6:26 AM London time, while West Texas Intermediate traded at $57.87 per barrel, also down 0.1%.

Price movements during 2025 reflected a clear struggle between supply concerns on one hand and weak global demand on the other, amid rising production from countries outside the OPEC+ alliance and ongoing economic pressures in China. In 2026, questions arise about whether current prices truly reflect the magnitude of upcoming risks, or if the market is still underestimating potential disruptions that could reshuffle the deck, whether in terms of supply or geopolitical issues.

Supply and Demand Equation

Oil prices stabilized in 2025 at a level just above $60 per barrel, after the effects of most geopolitical shocks experienced throughout the year faded away, including mutual tariffs and the 12-day war between Israel and Iran. Despite temporary price spikes that occurred with each escalation, the markets quickly returned to focusing on the supply-demand equation, where global demand remained relatively weak, especially from China, compared to pre-pandemic levels, against a clear abundance in supplies.

The structure of the futures price curve indicates a limited "backwardation" state which means that "the spot prices are slightly higher than later delivery prices," countered by a longer-term upward slope reflecting a "contango" state which indicates that "prices for long-term delivery are higher than for short-term delivery," suggesting that the market anticipates continued surplus supply throughout 2026, according to McNally.

Several institutions, including the International Energy Agency, predict a massive surplus in the market next year, while OPEC's secretariat maintains an optimistic outlook, predicting a modest surplus. In the longer term, low prices may prompt drilling companies to curb investments, potentially paving the way for a later price recovery.

This trend was reinforced by the return of voluntary OPEC+ cuts to the market, alongside significant increases in production from non-allied nations. Despite existing geopolitical risks, markets believe that current fundamentals are sufficient to curb any sustainable upsides, unless real supply disruptions occur.

Sensitive Files in the Supply Equation

Venezuela emerges as one of the most sensitive files in 2026, as its high sulfur heavy oil is an important element for complex refineries, particularly in the United States and China. Any widespread halt in Venezuelan exports could pressure refining margins and raise product prices, especially with the onset of winter and increased demand for heating oil. Although alternatives from Saudi Arabia, Kuwait, Iraq, Canada, and Mexico are available, these alternatives are often higher in cost.

McNally predicted that the Canadian and Mexican files would be less risky in the near term, as the United States tends to shield energy trade from any potential trade escalation. Canadian oil forms a vital artery for the American market, and quickly replacing it would be costly and challenging, making its continuing exemption from tariffs a likely option. However, he clarified that the simultaneous impact on supplies from Venezuela, with any other geopolitical escalation could reignite market volatility.

The American Petroleum Institute reported that crude inventories rose by 1.7 million barrels last week, the largest increase since mid-November. The Institute also noted rises in gasoline and distillate stocks.

Oil Price Ranges in 2026

Looking ahead to 2026, estimates suggest that Brent prices will fluctuate within a wide range governed by the degree of geopolitical stability. In the baseline scenario, the price may hover around $55 per barrel, supported by a relatively balanced supply-demand situation.

However, if economic pressures escalate or OPEC+ fails to manage supply, prices could drop deeper towards $40 per barrel, a level that could enforce a broad halt in American shale oil production within a few months.

OPEC+ members are scheduled to hold a virtual meeting on January 4, and they are expected to commit to freezing any additional supply increases, in light of increasing evidence of a market surplus, according to Bloomberg.

Conversely, any major geopolitical escalation either in the Middle East or Latin America could temporarily push prices to higher levels, but the market seems less prepared to price in these scenarios beforehand. Among these possibilities, the overall trend remains contingent upon producers' ability to regulate supplies, and whether political risks will shift from mere temporary noise to a real shock in the market.