Global Oil Market Battles Supply Glut as Geopolitical Tensions Provide Limited Support

Energy markets faced headwinds on Wednesday as crude oil and refined products retreated from early gains. February WTI crude futures finished down 0.53 points (-0.91%), while February RBOB gasoline contracts declined 0.0180 (-1.04%), as investors digested a mixed inventory report and the strengthening US dollar index, which climbed to a one-week peak.

Supply Concerns Outweigh Geopolitical Risk Premium

The primary driver behind crude’s weakness stems from an oversupplied global market. The IEA projected a record global oil surplus of 4.0 million barrels per day for 2026, prompting OPEC+ to announce in late November that it would pause further production hikes during the first quarter of 2026. Despite these production restraint measures, supply pressures persist.

OPEC’s November production totaled 29.09 million bpd, down 10,000 bpd from the prior month, yet the organization continues its gradual restoration of production cuts initiated in early 2024. The cartel still has 1.2 million bpd of supply cuts remaining to unwind from its original 2.2 million bpd reduction.

US crude output remained robust, with production in the week ended December 26 holding steady at 13.827 million bpd—marginally below the November 7 peak of 13.862 million bpd. The EIA has increased its 2025 US production forecast to 13.59 million bpd from 13.53 million bpd.

Meanwhile, active US oil rigs ticked up by three to 412 in the week ended January 2, rebounding from a 4.25-year low of 406 rigs posted just two weeks prior. However, the count remains significantly depressed compared to the 627 rigs operating in December 2022—indicating muted growth sentiment among producers.

Contradictory Weekly Inventory Signals

The EIA’s Wednesday report sent mixed signals to market participants and oil ETF investors monitoring energy allocations. On one hand, crude inventories unexpectedly fell by 1.93 million barrels—a pleasant surprise versus the anticipated 500,000 barrel build. However, this positive was overwhelmed by bearish product data.

Gasoline stocks surged 5.8 million barrels to reach an 8.5-month high, far exceeding the expected addition of 1.95 million barrels. Distillate inventories climbed by 4.98 million barrels, well above the forecast of 1.55 million barrels. Additionally, crude stockpiles at Cushing—the WTI delivery hub—increased 543,000 barrels.

Seasonal comparisons revealed a nuanced picture: crude inventories sat 3.0% below the five-year seasonal average, suggesting relative tightness. Conversely, gasoline supplies exceeded the seasonal norm by 1.9%, while distillates fell 3.7% below their five-year average.

Chinese Demand Provides Tentative Support

One bright spot emerged from China’s import activity. According to Kpler data, Chinese crude imports are projected to increase 10% month-over-month to reach a record 12.2 million barrels per day as Beijing rebuilds strategic reserves. This demand surge offers marginal support to crude valuations despite the broader glut narrative.

Multiple Geopolitical Flashpoints Limit Downside

Despite supply abundance, oil prices have retained support from several geopolitical developments. Sanctions and military operations targeting Venezuelan oil exports have constrained shipments, as the US Coast Guard forced the sanctioned tanker Bella 1 away from Venezuelan shores last week, with US forces maintaining surveillance as part of the Trump administration’s blockade strategy.

Nigerian production faces disruption from security concerns. The US conducted airstrikes on ISIS targets in Nigeria in coordination with the Nigerian government, actions that have commanded market attention given Nigeria’s status as an OPEC member. Prior administration warnings about potential strikes should ISIS activities targeting Christians persist underscore the volatility risk surrounding West African crude supplies.

Russian energy infrastructure has deteriorated significantly under Ukrainian assault. Over four months, Ukrainian drone and missile attacks have targeted at least 28 Russian refineries, constraining export capabilities and reducing global supply availability. Since late November, attacks on Russian tankers in the Baltic Sea have accelerated, with at least six vessels struck by unmanned systems. Concurrent US and EU sanctions on Russian oil firms, infrastructure, and shipping have compounded export pressures.

OPEC+ delegates indicated on Tuesday that the organization would maintain its production pause plan during Sunday’s video conference, though this has provided only modest support to prices amid the demand growth concerns and inventory excess.

Dollar Strength Weighs on Commodity Pricing

The rally in the US dollar index to one-week highs created additional headwinds for dollar-denominated commodities. As the greenback strengthened, crude oil and other energy contracts faced increased selling pressure from international buyers, reflecting the inverse relationship between currency strength and commodity pricing power.

The Broader Market Context

The combination of OPEC+ production discipline, geopolitical supply disruptions, and Chinese demand recovery has created a complex market environment. Oil ETF allocations and institutional positioning remain sensitive to shifting narratives around global growth, production trajectories, and the durability of the current supply glut. While near-term support from sanctions, military operations, and demand rebuilding persists, the fundamental oversupply picture continues to restrain upside price potential through early 2026.