Oil Heads for Deepest Annual Loss Since 2020 on Surplus Concerns

(Bloomberg) — Oil headed for its steepest annual loss since the start of the pandemic in 2020, in a year that has been dominated by geopolitical risks and steadily rising supplies across the globe. A punishing surplus is expected to weigh on prices in 2026.

West Texas Intermediate held near $58 a barrel on Wednesday, with prices down 19% this year. In the short-term, traders are focused on an OPEC+ meeting at the weekend and President Donald Trump’s policies toward major producers Russia, Iran and Venezuela.

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But the long-term narrative has remained consistent: Oil markets are oversupplied. Both the International Energy Agency and the US government see production exceeding consumption by just over 2 million barrels a day in 2025 and that surplus worsening in the coming year.

OPEC+ roiled markets earlier this year by reversing its longstanding policy of defending prices and raised output, seeking to reclaim market share as countries including Brazil and Guyana boosted supply and the US pumped at record levels. The producer group is expected to hold off on output hikes during talks this weekend.

The drop in crude has helped to reduce inflationary pressures, helping central bankers as they seek to contain price gains. The US Federal Reserve cut rates three times in 2025, and minutes from policymakers’ last meeting showed most officials saw more reductions as appropriate. Still, it also threatens to reshape the budgets of major oil-producing nations and companies.

“The oil market is set to remain oversupplied into 2026, with strong non-OPEC production from the US, Brazil, Guyana and Argentina outpacing uneven global demand,” said Kaynat Chainwala, an analyst at Kotak Securities Ltd. Prices should stay range-bound between $50 and $70, with risks over Venezuelan or Russian supply remaining supportive, she added.

In the US, a weekly government report on Thursday showed that overall petroleum stocks were at their highest since October, with a strong build in refined products outpacing the draw in crude oil.

China Storage

Despite the drop for prices this year, a clutch of factors have ensured that crude futures haven’t fallen further. Prices held within a range above $65 for much of the summer in spite of the swelling production, as much of the oversupply ended up in storage tanks in China, far away from the pricing hubs for crude futures. In contrast, western facilities remained relatively empty, with the tank farms at Cushing, Oklahoma — the pricing point for West Texas Intermediate futures — heading for its lowest annual average storage level since 2008.

Output of gassy types of oil like propane has also soared as US shale fields produce lighter types of fuel. Those volumes also have limited impacts on crude pricing.

Geopolitics will also help to shape the market outlook into next year. The US is driving efforts to end the war in Ukraine, an outcome that could ease the volume of Russian oil building up at sea. The US is also seizing tankers carrying Venezuelan cargoes, and the south American nation has had to reduce output in recent days as a result.

Trump also said this week that he would strike Iran again if it rebuilds its nuclear program. Brent futures surged above $80 after he authorized attacks on Iran earlier this year but slid rapidly when it became clear the conflict was ending.

–With assistance from Sarah Chen, Yongchang Chin, John Deane, Grant Smith and Will Kubzansky.

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