SunSirs: Oversupply Drives Crude Oil Price Center Lower

In 2025, the overall crude oil price showed a trend of being high in the first half and low in the second half with the center of gravity shifting downward. In the second half of the year, under the pricing of weak fundamentals, it maintained low volatility.

OPEC+ and non-OPEC+ production both increase

There is an expectation of production growth from OPEC+. In 2025, OPEC+ will continue the voluntary production cut measure of 2.2 million barrels per day in the first quarter, and will gradually lift the production cut measures starting from April, leading to continuous growth in production. In the first quarter of 2026, considering weak demand, OPEC+ will suspend production increases, and it is expected that the pace of its production increases will be adjusted according to peak and off-seasons.

Geopolitical risks may intermittently disrupt oil prices. In November 2025, the daily crude oil production of Saudi Arabia, the United Arab Emirates, Iraq, and Kuwait was 2.2 million barrels, 700,000 barrels, 400,000 barrels, and 300,000 barrels respectively. OPEC+ has ample spare production capacity and can make up for it in a relatively short period of time in the face of unexpected supply disruptions. The main geopolitical uncertainties lie in Iran, Russia-Ukraine, and Venezuela.

Looking back at the U.S. withdrawal from the "Iran Nuclear Deal" in 2018 and the Israel-Iran conflict in mid-2025, the corresponding increase in oil prices was around $13 per barrel. In November 2025, Iran's crude oil production was 3.221 million barrels per day.

Regarding Russia and Ukraine, the sanctions imposed by Biden on Russia in January 2025 and the sanctions by the United States on Russia's two major oil giants in October 2025 each led to an increase in oil prices of around $5 per barrel. However, the impact of news on oil prices is mostly short-lived. At present, the advancement of the Russia-Ukraine peace agreement still requires consultations among all parties, during which crude oil prices are disturbed by relevant news.

After experiencing long-term sanctions and poor management, Venezuela's crude oil production was only 934,000 barrels per day in November 2025. At the end of 2025, the United States intercepted and seized Venezuelan oil tankers, which affected the latter's exports. On January 3, 2026, the United States forcibly took control of Venezuelan President Maduro, leading to an increase in geopolitical risks. However, Trump has demanded that major U.S. oil companies invest in Venezuela, and there are expectations that Venezuela's crude oil exports will increase.

The incremental non-OPEC+ supply is mainly in Brazil and Guyana. According to data from the Federal Reserve Bank of Dallas, oil prices between $26 and $45 per barrel can cover the operating costs of completing shale oil wells, and oil prices between $61 and $70 per barrel will lead to the addition of new oil wells. Currently, low oil prices have dampened the motivation for drilling new oil wells in the United States, but there is still profit margin in inventory wells. Although the number of new oil wells has decreased, it is expected that the current production level can be maintained. With multiple oil projects increasing production and starting operation one after another in 2026, the IEA predicts that Brazil's crude oil production will increase moderately by 260,000 barrels per day to 4.1 million barrels per day, and Guyana's crude oil production is expected to increase by 180,000 barrels per day to 890,000 barrels per day.

Crude oil demand is expected to be weak

China's crude oil demand is growing moderately. In 2025, the replacement of traditional fuel vehicles by new energy vehicles will be further strengthened, and the proportion of new energy vehicle sales in passenger vehicles and automobiles will have exceeded that of traditional fuel vehicles. From 2021 to February 2023, the proportion of traditional fuel vehicles in passenger vehicles dropped from 93% to 68%, and the actual consumption of gasoline dropped from 15.3706 million tons to 12.52 million tons. Currently, although the proportion of new energy vehicle sales has increased, the average monthly gasoline consumption has remained basically stable at around 13.5 million tons. The replacement pace of new and old energy sources for diesel is not as fast as that for gasoline. The actual consumption has been declining since 2023, with a year-on-year drop of 3.84% from January to November 2025. Although the purchase tax on new energy vehicles will be halved in 2026, the new energy replacement effect still exists, and there is still room for a decline in diesel consumption. In 2026, the trade environment will improve, and the domestic macro environment will be favorable. However, due to the sluggish manufacturing industry, the IEA, OPEC, and EIA respectively predict that China's daily crude oil demand will increase moderately by 200,000 barrels, 200,000 barrels, and 290,000 barrels year-on-year in 2026, reaching 16.94 million barrels, 17 million barrels, and 16.85 million barrels.

Demand for crude oil in Europe and the United States is moderate. The "Inflation Reduction Act" provides potential support for U.S. economic growth. Coupled with expectations of loose monetary policies and low oil prices boosting refinery profit margins, U.S. crude oil demand is expected to remain stable in 2026. The IEA and OPEC respectively predict that U.S. crude oil demand will increase slightly by 30,000 barrels and 10,000 barrels per day year-on-year, reaching 20.65 million barrels and 20.8 million barrels per day. However, the EIA predicts that U.S. crude oil demand will decrease slightly by 10,000 barrels per day, to 20.58 million barrels per day. Europe's manufacturing PMI was below the boom-bust line for most of 2025. OPEC and EIA respectively predict that Europe's crude oil demand will increase slightly by 10,000 barrels and 12,000 barrels per day year-on-year in 2026, reaching 13.6 million barrels and 13.58 million barrels per day, but the IEA predicts that Europe's crude oil demand will decrease slightly by 3,000 barrels per day, to 13.42 million barrels per day.

India's crude oil demand continues to grow. Policy support, increased consumer spending, and eased inflationary pressures will drive India's economy to maintain a growth momentum in 2026. The IEA, OPEC, and EIA respectively predict that India's daily crude oil demand will increase by 160,000 barrels, 200,000 barrels, and 170,000 barrels year-on-year in 2026, reaching 5.78 million barrels, 5.9 million barrels, and 5.82 million barrels.

Inventory has both long and short positions

Global crude oil inventories are bearish, while U.S. crude oil inventories are bullish. In 2025, there is a global oversupply of crude oil, with inventories increasing continuously, and both floating storage and in-transit inventories of crude oil are at high levels. However, U.S. commercial crude oil inventories are low, and under low oil prices, there is a need to replenish strategic petroleum reserves.

The Federal Reserve starts an easing cycle

The Federal Reserve cut interest rates three times in 2025, with a cumulative rate cut of 75 basis points. Currently, the U.S. labor market is cooling down, the consumer confidence index has fallen to a low level, and inflation has dropped below 3%. According to the Federal Reserve's dot plot, it is expected that there will be one 25-basis-point rate cut each in 2026 and 2027. In May 2026, the chairmanship of the Federal Reserve will change. The market expects the Federal Reserve to start a new round of easing cycle, with rate cuts concentrated in the first half of the year, but the independence of the Federal Reserve may face challenges.

Summary

Looking ahead to 2026, both OPEC+ and non-OPEC+ production are expected to increase, with geopolitical uncertainties causing disruptions and demand expectations being relatively moderate. It is anticipated that the crude oil market will be oversupplied, continuing the inventory accumulation trend. The weak fundamentals will drive the oil price center downward, though the downward pace may be relatively slow. The low level of U.S. commercial crude oil inventories and the demand for refilling the Strategic Petroleum Reserve (SPR) may provide some support. Weak fundamentals determine the lower limit of oil prices, while the pulse-like increases triggered by geopolitics and sanctions determine the upper limit. If geopolitical factors do not escalate further, crude oil prices will return to being priced based on weak fundamentals. It is projected that the Brent crude oil price will trade in the range of $50 to $78 per barrel, and the WTI crude oil price will trade in the range of $45 to $72 per barrel.

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