Sasha Foss
Energy Markets Analyst - CSC Commodities
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The 2026 Oil Landscape: Oversupply Versus Geopolitical Risk
Oil markets in 2026 are dealing with two opposing narratives. Physical supply is expected to exceed demand by 3.7 million barrels per day, according to the International Energy Agency. Major new oil production from non-OPEC countries such as Guyana, Brazil, Canada, Argentina and the US have flooded the market with material.
Geopolitical Events Reshaping Market Expectations
On the other hand, the year has already started with a wave of geopolitical events that will have significant impacts on oil markets. Civil unrest in Iran could have major implications on oil exports in a country that produces roughly 5.5 million b/d of oil equivalents. Venezuela had their president, Nicolas Maduro, seized and arrested by US special forces. Their oil exports are currently being controlled by the US, and the country has the largest proven oil reserves in the world.
Global Tensions Around NATO, Canada & Taiwan
Other significant tensions include President Trump’s overtures on Greenland and Canada which could spell the end of the NATO alliance, China’s military threats over Taiwan, and the continued peace talks between Russia-Ukraine.
Sanctions, Trade Routes, and the Growing Volume of Oil-on-Water
A re-routing of traditional oil flows occurred after Russia’s invasion of Ukraine. These principal flows have evolved with iteration of sanction policy.
Indian & Turkish Distillate Exports and the Impact of EU Sanctions
For example, Indian and Turkish exports of middle distillates to Europe surged as they took a margin by processing Russian crude. However, the recent implementation of the EU’s 18th sanctions package has derailed this trade with Russia’s oil exports to India at a three-year low.
US Energy Dominance and Sanctions Pressure
The US has stepped up its exports to Europe as it pursues its agenda of “energy dominance.” Meanwhile, sanctions on Iran and Venezuelan oil have also complicated trade routes.
Oil-on-Water and the Risk of a Sudden Supply Release
Traders are aware of a massive amount of oil-on-water due to elongated supply chains and weak prices. Any peace deal between Russia-Ukraine would be tantamount to a co-ordinated supply release, as relieved sanctions would dramatically weaken prices at key centres.
China’s Stockpiling Strategy and the Hidden Global Surplus
Despite the supply surplus in physical markets, much of it is being masked by aggressive Chinese purchasing.
China’s Strategic & Commercial Reserve Buildout
China is building out its strategic and commercial oil reserves as it attempts to achieve energy security in a geopolitically fragile environment. China’s latest crude surplus was 2.67 million b/d in December as it took advantage of low global crude prices.
Impact on Stock Data and Price Discovery
Meanwhile, China’s hoovering up of surplus crude means it is not showing up in stock data in key pricing centres. Should China’s stockpiling ease then the true global surplus will reveal itself and be bearish for oil prices.
Product Demand Trends: EV Adoption, Petrochemicals, and Jet Fuel
The electric vehicle revolution will transform oil demand, China’s registration of car sales is now majority electric vehicles. However, the pace of change has been slower than anticipated in the US and Europe.
EV Growth Divergence Between Regions
The IEA’s 2025 new oil demand estimates showed that the biggest absolute increase in oil demand last year came from gasoline, up 304,000 b/d. In Europe, gasoline and hybrid cars are replacing the largely unpopular diesel vehicles rather than full electric.
Petrochemical Expansion in Asia
Meanwhile, US natural gas liquid production is expected to surge in 2026, with petrochemical production a key growth area for global oil demand. Petrochemical growth will be concentrated in Asia, with European facilities closing amidst high operating costs.
Jet Fuel Recovery Continues
Jet fuel is expected to continue its post-pandemic growth with international travel robust, particularly in Asia.
Political Drivers: US Midterms and the Push for Lower Fuel Costs
This year there will be US midterm elections in November with affordability a key theme. US gasoline prices are an outsized metric in voters mind, given its constant visibility and importance to household budgets.
Volatility and the “Drill, Baby Drill” Agenda
Prices are more volatile in the US than other developed economies as taxes make up a lower proportion of the retail price. As such, President Trump will continue his “Drill, baby drill” agenda, despite industry anxiety over low prices.
OPEC’s Approach to Q1 2026
OPEC is expected to keep production steady for Q1 26.
Outlook for 2026: A Buyer’s Market Amid Structural Shifts
2026 will be a volatile year for oil markets, just in January there has been regime change in Venezuela, mass civil unrest in Iran, and the potential end to the NATO alliance as the US covets Greenland.
Demand Challenges in Low-Growth Economies
However, the background themes of electrification, low growth in developed economies, and a fall in trade due to tariffs mean the market can no longer rely on steady demand growth.
Competing Supply Streams and Market Share Battles
A confluence of supply streams coming online and a battle over market share during a year of US midterms where affordability is a key battle should keep 2026 as a buyer’s market.
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