Crude oil faces extended downside risks amid ample supply through year-end

There are downside risks for oil in the coming months, particularly from higher supply. However, prices could rise again from the beginning of 2026, according to experts. 

Eight OPEC+ nations implementing voluntary output reductions agreed over the weekend to boost oil production by 411,000 barrels daily in July.

This marks the third consecutive monthly output increase.

Ahead of the meeting, speculation about an even larger output surge drove oil prices up considerably, recovering losses from the prior week's close. 

Rumors had circulated regarding a potential major production increase, leading to this price rebound.

There were reportedly differing opinions at the virtual OPEC+ meeting over the weekend.

Saudi Arabia advocated for a larger output increase, in contrast to Russia and two other nations who preferred to maintain current production levels.

OPEC's compromise

The decision reached was therefore a compromise.

“With the increase in supply that has now been approved, more than half of the voluntary production cuts of 2.2 million barrels per day have already been reversed,” Carsten Fritsch, commodity analyst at Commerzbank AG, said. 

“However, the justification for the production increase (stable economic outlook, healthy market fundamentals) given in the press release, which was identical to the previous month, does not sound very convincing.”

Indeed, this likely focuses mainly on penalising significant quota exceeding nations, like Kazakhstan, according to Fritsch.

The stated increase in production volume is improbable. This is due to both other nations, like Iraq and the UAE, already exceeding their agreed-upon limits, and this underlying reason.

Fritsch added:

Supply

Presently, the oil market appears capable of handling the increased supply.

According to Rystad Energy, the summer months from June to August result in higher demand for oil. These three months could be ideal for production increases from OPEC. 

“However, a considerable oversupply could loom in the autumn if OPEC+ increases oil production at the same rate in the coming months,” Fritsch noted.

Inventory levels are currently low in the US, indicating a supply shortage. This shortage will probably be a significant factor too, according to Commerzbank.

Amid tariff-related market volatility sparked by US President Donald Trump's announcements, Brent oil prices have fluctuated since April. 

After experiencing sharp declines in early April and May, the price of Brent oil has stabilised, trading within the $63 to $67 per barrel range in recent weeks.

From Friday’s close to Monday’s high, crude oil gained nearly 5% before pulling back a touch. 

Supply in 2026

Next year's oil market may become tighter, with OPEC+ unlikely to increase supply.

Production cuts other than the voluntary reductions of 2.2 million barrels per day by the eight nations, agreed upon by OPEC+ will remain in place through the end of 2026.

Lower prices may lead to a stagnation, or even a potential decline, in US oil supply while other factors are occurring.

Last week saw US drilling activity dip to its lowest point since November 2021, as reported by oil service provider Baker Hughes.

Demand for oil is also likely to recover from tariff-related conflicts next year, which could absorb supply increases, if any. 

Prices

“There are therefore downside risks for the oil price in the coming months,” Fritsch said. 

At the time of writing, the price of West Texas Intermediate crude oil was at $63.13 per barrel, down 0.4%. The most-active contract of Brent crude on the Intercontinental Exchange was at $65.36 a barrel, also down 0.4% from the previous close. 

Oil prices received upward momentum due to Alberta's wildfires. This occurred while the market simultaneously assessed the newly publicized supply increase from OPEC+ for July. 

“There continue to be clear signs of tightness in the spot oil market as we move closer towards the Northern hemisphere summer,” analysts at ING Group said in a note. 

The recent strengthening of Brent and WTI prompt timespreads is notable, especially as trading remains in a significant backwardation state.

However, for others the oil price outlook remains uncertain. 

“The outlook is uncertain. Front-month WTI has traded in a relatively tight range over the past three weeks, with support around $60, and resistance near $63 on a closing basis,” said David Morrison, senior market analyst at Trade Nation.