 "Oil stuck in tug-of-war between supply glut and geopolitics, says analyst")
Oil prices stuck between geopolitical forces and supply pressure
Crude oil prices are set for weekly gains, with WTI near $59.50 per barrel on Friday. Despite this uptick, the short-term outlook remains uncertain, shaped by a tug-of-war between bearish fundamentals—driven by supply glut fears—and bullish geopolitical risks and technical breakouts. These dynamics foster volatility, favouring a “fade the rally” approach unless a major supply disruption occurs. Year-to-date, oil has lost roughly 16 per cent of its value, underscoring persistent market pressure.
Fundamental headwinds (bearish)
The primary downward pressure on prices stems from a growing supply-demand imbalance. The global surplus has increased from 0.5 bmpd to around 1.5 mbpd in the last six months.
Weakening Demand: Global oil demand growth is sluggish, with continued moderation in advanced economies (OECD). While growth in non-OECD countries, particularly India, remains robust, where demand is expected to reach around 6 mbpd in 2026 from avg of 5.2mbpd of now. Saudi has reduced its OSP for January for all the geographies, signalling a weak demand.
Surging supply: Non-Opec+ output, led by the US, is robust. More critically, the Opec+ alliance has signalled a phased unwinding of its voluntary production cuts, adding barrels to a market that is already showing signs of surplus. This has led to forecasts of rising global inventories through the start of 2026, putting clear downward pressure on long-term price anchors. The U.S. Energy Information Administration (EIA) forecasts Brent crude to drop to an average of $54/barrel in Q1 2026, and the IEA expect surplus to reach above 3 mbpd by the end of 2026.
Inventories: In recent months, the Observed global oil inventories, particularly "oil on water," have been rising, suggesting supply is outpacing current consumption. US inventories at commercial storage have experienced a mixed trend. In late October/early November, there were periods of multiple straight weekly builds. However, long-term average remains 3 per cent below the 5-year average inventory level.
Technical and geopolitical tailwinds (bullish/volatile)
While fundamentals appear bearish, short-term momentum can be driven by market sentiment and risk.
Geopolitical risks: The most significant source of price volatility is geopolitical tension. Events like drone strikes on Russian infrastructure have crippled 20 per cent of refining capacities, affecting the product supplies in Russia or continued supply risks in the Black Sea and other key producing regions. US Military/Geopolitical: Heightened tensions, including military manoeuvres or airspace restrictions, have been observed, which Venezuela views as an external threat aimed at its resources. Such instances could see an immediate and sharp spike in prices.
Technical breakouts: For benchmarks like WTI, a recent break above a descending channel and near key resistance levels (like the $60/barrel psychological mark) suggests a short-term shift in trader sentiment, potentially forcing short-covering and quick momentum moves.
Seasonal demand: The onset of winter in the Northern Hemisphere typically boosts demand for heating oil and other refined products, which can provide a brief, seasonal lift to crude prices.
Conclusion
In the immediate short term, price action is likely to be volatile and event-driven, with geopolitical events and inventory reports causing sharp swings. The FOMC rate cut decision could see a weakening of the USD would also lend support to crude oil prices. However, the overarching fundamental reality of excess supply against a backdrop of slowing demand suggests that major, sustained rallies are likely to face resistance.
The short-term market remains a trader's environment, where upward movements driven by technical breakouts or geopolitical fears may fade as the structural supply overhang reasserts itself. For WTI, the immediate resistance is around $60, while long-term support remains around $55.
(Disclaimer: This article is by Mohammed Imran, research analyst at Mirae Asset Sharekhan. Views expressed are his own.)