Oil Heads for Worst Year Since 2020 as Supply Glut Looms
Brent crude fell to $61 on Friday, down 18% for the year. The IEA projects a 3.84 million bpd surplus in 2026, with prices potentially dropping to $55.
Oil is closing out 2025 with its worst annual performance since the pandemic crash.
Brent crude fell $1.13 on Friday to $61.11 per barrel. West Texas Intermediate dropped to $57.22. Both benchmarks are down roughly 18-20% for the year—a stark reversal from the supply concerns that dominated headlines just months ago.
The culprit isn't demand destruction. It's too much supply, and more coming.
The Numbers
Friday's decline came on thin post-holiday volume, but the trend has been relentless. Brent touched a near five-year low on December 16 before bouncing slightly on temporary supply disruptions. That bounce has already faded.
For perspective: Brent averaged $82 per barrel in 2024. The current price represents a 25% discount from last year's average—and the gap could widen.
The International Energy Agency's December oil market report projects global supply will exceed demand by 3.84 million barrels per day in 2026. That's not a typo. Nearly 4 million barrels daily with no home.
The U.S. Energy Information Administration is equally bearish. Its forecast calls for Brent to average $55 per barrel in Q1 2026 and remain near that level through year-end. If accurate, oil prices would be roughly half where they were during the 2022 energy crisis.
Why the Glut
Three factors are flooding the market.
U.S. shale keeps producing. American output hit record highs in 2025 despite lower prices. Efficiency gains have lowered breakeven costs across the Permian Basin, allowing producers to profit at prices that would have been unprofitable five years ago. The rig count has stabilized, but production per rig continues climbing.
OPEC+ discipline is fraying. The cartel has maintained production cuts on paper, but compliance has been spotty. Some members need the revenue too badly to leave barrels in the ground. Others are positioning for market share in what could become a price war.
Non-OPEC supply is surging. Guyana, Brazil, and Canada have all ramped up production. These countries aren't bound by OPEC+ quotas and have no incentive to restrain output while prices cover their costs.
The Demand Picture
Global oil demand isn't collapsing. The IEA expects consumption to grow modestly in 2026, driven by emerging markets and aviation recovery. But growth isn't keeping pace with supply additions.
China remains the wildcard. The world's largest oil importer has seen its demand growth slow as the economy transitions away from infrastructure-heavy investment. Electric vehicle adoption is accelerating, displacing gasoline consumption faster than many forecasts assumed.
Europe and the U.S. are mature markets with flat-to-declining demand. Fuel efficiency standards, EV mandates, and remote work have structurally reduced oil consumption. Those barrels aren't coming back.
Geopolitical Factors
Ironically, peace could make prices worse.
Markets reacted Friday to signs of progress in Ukraine peace talks ahead of a potential Zelenskyy-Trump meeting. A ceasefire could eventually allow more Russian oil to return to legitimate markets, adding to an already oversupplied situation.
Russian crude never fully left the market—it just found new buyers in China and India at discounted prices. But full reintegration would increase price transparency and likely push benchmark prices lower.
The Venezuela situation adds complexity. U.S. sanctions have constrained Venezuelan exports, but any policy shift could release additional supply. The same logic applies to Iran, where diplomatic developments could unlock significant production capacity.
What It Means for Energy Stocks
Energy was the worst-performing S&P 500 sector in 2025, down roughly 12% while the broader index gained 18%. Oil majors like ExxonMobil and Chevron have outperformed pure-play producers, but even they face headwinds if crude stays below $60.
The integrated majors can weather low prices through refining margins and cost discipline. Smaller E&P companies face tighter conditions. Hedging programs bought time in 2025, but those hedges roll off. 2026 could force consolidation.
Oilfield services companies are already feeling the pinch. Lower activity levels mean fewer drilling contracts, reduced pricing power, and margin compression. The sector is trading at trough valuations for a reason.
The Contrarian Case
Oil markets have a way of overcorrecting. The bearish consensus is so widespread that any supply disruption—an OPEC+ surprise, a hurricane in the Gulf, a tanker incident—could trigger a violent squeeze.
Short positioning is elevated. If prices spike, the unwind could be dramatic.
But the fundamental picture argues against a sustained rally. Spare capacity is high. Inventories are building. And the transition away from fossil fuels, while slower than activists hope, is accelerating faster than the industry admits.
For now, oil is cheap and getting cheaper. The question is whether $55 is the floor—or just a stop on the way down.