At the start of the year, the consensus among oil analysts was clear: the crude market was entering a period of significant oversupply, a situation expected to keep prices low throughout 2026. After all, prices had fallen by roughly 20% in 2025 as this glut widened. Instead, the market has witnessed an unexpected rally, leaving prices higher than they were six months ago. This contradiction has traders puzzled, focused on why a large global surplus hasn’t translated into lower prices.
As it turns out, high supply and high prices can coexist. The key lies in a combination of geopolitical shocks and stronger-than-expected demand that have overshadowed the underlying surplus. Futures on the international pricing benchmark, Brent crude, have gained roughly 15% since January, while U.S. benchmark West Texas Intermediate crude is up about 14%.
The oversupply is very real. Estimates from a leading energy agency in January pointed to a surplus of nearly 3.7 million barrels per day, a level described by analysts as “extraordinary.” This glut developed as a major oil producers’ group spent much of the previous year increasing output, while record production from U.S. shale and other exporters continued to flood the market. Many had anticipated that global demand would decline as the world shifted toward greener energy.
Yet prices have climbed anyway, as traders factor in a series of unexpected disruptions. Recent sanctions on two of Russia’s largest oil producers appear to have removed about 600,000 barrels per day from the market. Exports from a major pipeline have also dropped significantly after drone strikes damaged a key terminal. Perhaps most importantly, growing prospects of military conflict in the Middle East have raised fears of disruptions to the Strait of Hormuz, a critical passageway for about 20 million barrels of oil per day. Meanwhile, attacks on commercial shipping have forced tankers onto longer routes, tightening physical markets and raising freight costs.
On the demand side, the story has also been surprising. While manufacturing has slowed in some major economies, stronger transportation figures, demand growth in other regions, and unexpected cold weather have boosted consumption. Furthermore, a major Asian nation is expected to bring more storage capacity online, extending its buying spree. Strong economic data from the United States has also provided a bullish signal. As a result, the demand forecast for 2026 was recently revised upward.
Despite these factors, the market remains in a state of oversupply, with analysts generally agreeing on a glut of at least 2 to 3 million barrels per day. One major financial institution maintains its price target for Brent crude to average $56 per barrel in 2026, representing a drop of more than 20% from current levels. Another analysis firm estimates the “fair value” of oil, based purely on supply and demand fundamentals, is around $61.
So, for now, a combination of hot geopolitical risks and resilient demand is keeping prices afloat. As one analyst noted, “We still think that we are going to see significant oversupply in the market.” But if the geopolitical situation remains tense, you could still have an elevated oil price even with a surplus.
