Energy Markets Battle Between Supply Glut Pressures and Geopolitical Support

Oil and gas markets faced downward momentum on Friday as investors grapple with an emerging global supply glut. February WTI crude oil contract fell -0.10 points (-0.17%), while February RBOB gasoline dropped -0.0168 (-0.08%), both touching 2-week lows. The primary driver remains expectations for record crude production to outpace global consumption in 2026, marking a significant shift in market dynamics.

The Surplus Challenge Takes Shape

Both the International Energy Agency (IEA) and US government forecasters have signaled that production will exceed consumption. The projected global supply glut is staggering—the IEA estimates a record 3.815 million barrels per day (bpd) surplus for 2026, up from a 4-year high of over 2.0 million bpd anticipated for 2025. This oversupply scenario has rattled investors, with a stronger US dollar on Friday adding additional selling pressure to energy commodities.

Storage data underscores the mounting supply concerns. Vortexa reported that crude oil sitting on stationary tankers (held for at least 7 days) surged 15% week-over-week to 129.33 million barrels in the week ending December 26. Such inventory buildups typically signal weak demand relative to supply.

Offsetting Factors Keep Prices From Collapsing

Despite the glut headwinds, crude has found support from multiple fronts. OPEC+ is expected to maintain its pause on production increases when the group conducts its monthly video conference on Sunday. This production discipline signals the cartel’s awareness of market dynamics and its reluctance to flood markets with additional barrels.

Geopolitical tensions continue limiting downside risks. Ukrainian drone and missile campaigns have damaged at least 28 Russian refineries over four months, reducing Moscow’s export capacity. Ukraine has also intensified attacks on Russian tankers in the Baltic Sea, with at least six vessels struck since late November. Combined with fresh US and EU sanctions on Russian oil infrastructure and carriers, these disruptions have constrained global supplies.

Venezuela and Nigeria present additional complexity. US forces maintain a blockade targeting sanctioned Venezuelan oil tankers, including intercepting the vessel Bella 1 last week. The US also launched strikes on ISIS targets in Nigeria in collaboration with the Nigerian government—a move supporting crude prices as Nigeria serves as an OPEC member.

Demand Signals from China Provide Some Relief

China’s crude purchases show surprising resilience. According to Kpler data, Chinese crude imports in December are expected to climb 10% month-over-month to a record 12.2 million bpd as the nation rebuilds strategic reserves. This demand strength offers a counterweight to the anticipated global supply glut.

US Production Metrics and Rig Activity

The EIA revised its 2025 US crude production forecast upward to 13.59 million bpd from 13.53 million bpd. US production in the week ending December 26 held steady at 13.827 million bpd, just shy of the record 13.862 million bpd hit in November.

Rig activity provided a modest positive signal. Baker Hughes reported that active US oil rigs rose 3 units to 412 rigs in the week ended January 2, bouncing back from a 4.25-year low of 406 rigs recorded December 19. However, this remains substantially below the 5.5-year peak of 627 rigs from December 2022, reflecting the industry’s cautious stance toward expansion amid supply glut expectations.

Inventory Snapshot

EIA data from December 26 revealed a mixed inventory picture: US crude stocks stood 3.0% below the 5-year seasonal average, gasoline inventories were 1.9% above average, and distillate stocks were 3.7% below average. The divergence suggests uneven demand patterns across refined products.

The Bottom Line

Energy markets are caught between powerful opposing forces. Record supply forecasts and storage buildups are pushing prices lower, while geopolitical friction, OPEC+ production discipline, and emerging Chinese demand offer temporary relief. The global supply glut remains the dominant narrative, but disruptions in Russia and Venezuela, combined with measured output decisions from OPEC+, are preventing a complete collapse in oil valuations.