Even with a daily oversupply of 3 million barrels, oil prices can't be pushed down? Analyst: Geopolitical risk premiums and demand exceeding expectations are "taking over" the market

According to the Tongce Financial APP, by 2026, oil analysts’ consensus is that the crude oil market is entering a period of deep oversupply, which could continue to suppress prices throughout this year. In 2025, as oversupply worsened, oil prices fell about 20%. However, this year, amid geopolitical shocks and stronger-than-expected demand, oil prices have unexpectedly risen. Currently, oil prices are higher than six months ago. Goldman Sachs strategists wrote in a client report that this has caused traders to “focus on why the global large-scale oversupply… has not yet translated into a sustained decline in Brent prices in 2026.”

But analysts say these two indicators do not necessarily move in sync.

“My thinking is that these two things… they may coexist,” said Jorge Leon, Head of Geopolitical Analysis at Rystad Energy.

Since the beginning of this year, the international benchmark Brent crude futures have risen about 15%, while WTI crude futures have increased slightly less, by 14%.

As of January, the International Energy Agency (IEA) estimated that the oil market was oversupplied by about 3.7 million barrels per day, which Macquarie analysts recently described as “extreme oversupply” in a client report.

OPEC+ has mostly been unwinding production cuts throughout 2025. In the Americas, U.S. shale oil production remains at record levels, and other regional exporters are also increasing output. Meanwhile, as the world shifts toward electrification and other forms of green energy, global demand for hydrocarbons is expected to generally decline.

However, due to traders factoring in various unexpected supply constraints and upward revisions to demand forecasts, oil prices have still risen.

U.S. sanctions on Russia’s two major oil producers, Rosneft and Lukoil, seem to have reduced daily supply by about 600,000 barrels; at the same time, exports through the Caspian Pipeline Consortium (CPC) pipeline between the Caspian Sea and the Black Sea have fallen by about 440,000 barrels per day after drone attacks on the Black Sea coast export terminals, reaching the lowest levels in at least seven years.

Meanwhile, the likelihood of U.S. military action against Iran is increasing, causing oil prices to surge due to potential disruptions in the vital Strait of Hormuz, through which about 20 million barrels of oil pass daily. Attacks on Red Sea shipping have forced tankers to reroute around the Cape of Good Hope, tightening physical markets and increasing freight costs for transporting oil products between Eurasia.

Demand remains stronger than expected.

European manufacturing data, which slowed down, was seen as a bearish signal, but better-than-expected shipping data, demand growth in other parts of the world, and unexpected cold weather offset this impact. As China extends its purchasing spree, more storage capacity is expected to come online soon.

Meanwhile, U.S. employment data for January far exceeded expectations, another bullish signal for demand, while OPEC+ oil producers’ output remains below targets, as members are producing below their allowed quotas.

Overall, the IEA recently raised its demand forecast for 2026 by about 100,000 to 200,000 barrels per day in January, while reporting a global supply decrease of 1.2 million barrels per day month-over-month.

None of this is enough to lift the market out of oversupply, with a general consensus still expecting at least a 2 to 3 million barrels per day surplus. Goldman Sachs maintains its $56 per barrel price target for Brent crude in 2026, implying a decline of over 20% from current levels, while Rystad Energy estimates the current “fair value” of a barrel of oil at $61 based on supply and demand fundamentals.

But geopolitical tensions and demand exceeding expectations, at least in the short term, continue to support oil prices.

“We still believe the market will experience a severe oversupply,” said Leon of Rystad. “But if geopolitical risks continue to escalate, even with oversupply, you might still see oil prices stay high.”