Oil glut fears return as supply wave builds

Oil prices have slipped back as a burst of supply, softer demand signals and easing disruption fears revive concern that the global market may be heading towards another glut.

Brent crude has traded close to $72 a barrel, while US benchmark West Texas Intermediate has hovered below $70, pulling prices towards levels seen before the latest Middle East supply scare. The shift has been sharp enough to change the shape of the Brent futures curve, with prompt cargoes losing value against later-dated barrels. That move into contango is a warning sign for traders: oil for immediate delivery is no longer scarce.

The pressure has built as Gulf exports normalise, stranded cargoes move into the market and buyers show less urgency to secure supplies. Traffic through the Strait of Hormuz, the route for a large share of seaborne crude and fuel shipments, has improved after weeks of disruption fears. The rebound has released barrels that had been delayed offshore or held back by uncertainty, adding to a market already facing fragile consumption.

The price retreat marks a rapid reversal from the panic that followed the Iran conflict and threats to regional shipping. Brent had carried a heavy geopolitical premium when traders feared a sustained squeeze in Gulf exports. That premium has faded as tankers move more freely and refiners reassess near-term needs. Some banks now see Brent falling towards $60 by the end of the year if flows remain steady and demand fails to absorb the extra barrels.

The deeper concern is not merely the return of Middle East cargoes. Supply growth from outside OPEC+ remains a structural challenge. Production gains in the Americas, led by the United States, Brazil, Guyana and Canada, have kept non-OPEC+ output resilient even as some shale operators face lower prices and tighter capital discipline. New offshore projects are adding high-quality crude at a time when refiners have fewer reasons to chase prompt barrels.

OPEC+ faces a difficult balance. The group has spent years managing supply to support prices, but members also want to defend market share as rival producers expand. Any further unwinding of output curbs risks deepening the surplus. Holding barrels back for too long, however, allows competitors to capture more demand. The market is now testing whether OPEC+ can manage both price stability and internal pressure from members seeking higher volumes.

Demand is offering little comfort. High fuel prices earlier in the year, trade disruption, weaker industrial activity and slower petrochemical consumption have lowered expectations for 2026. Global oil demand forecasts have been cut sharply since the start of the year, with second-quarter deliveries hit by product shortages and weaker end-user appetite. Aviation and petrochemicals, two sectors expected to drive part of the post-pandemic growth cycle, have shown uneven momentum.

Asia remains the key variable. China’s crude buying has been cautious, with refiners balancing weak margins, domestic inventories and uncertain export quotas. Other large importers are benefiting from lower prices but have not yet generated enough incremental demand to remove the overhang. For economies heavily dependent on imported crude, cheaper oil provides relief on inflation and external balances, but it also reflects a softer global demand backdrop.

The return of contango could encourage storage if the spread between prompt and future barrels widens enough to cover financing, insurance and tank costs. For now, the economics remain limited in several hubs, but the signal matters. Traders often store crude when the market expects today’s surplus to be worth more tomorrow. If floating storage rises or onshore tanks begin filling faster, pressure on prompt prices could intensify.

Refiners are also shaping the outlook. Margins have been volatile as crude prices fall faster than some product prices, but fuel demand has not strengthened evenly across regions. Diesel consumption remains linked to freight and manufacturing activity, both under strain from slower trade. Petrol demand is facing seasonal support in some markets, but efficiency gains and electric vehicle adoption continue to cap longer-term growth in key consuming economies.