Oil is starting 2026 with two opposing forces in play. On one side, most analysts foresee a heavily oversupplied market extending through 2026 and into 2027. On the other, markets are pricing in a notable risk premium amid the possibility of near-term production disruptions from Iran or Venezuela.
Oversupplied markets
Beyond the short-term headlines, the core supply-demand dynamics indicate a clearly oversupplied market. Barring a major geopolitical disruption, global inventories are expected to continue rising through 2026 and into 2027.
Some of the most credible forecasts reinforce this view. The US Energy Information Administration projects average global inventory builds of 2.8 million barrels per day (b/d) in 2026 and 2.1 million b/d in 2027. The International Energy Agency paints an even more bearish picture, projecting that supply will exceed demand by a staggering 3.7 million b/d – equivalent to nearly 4% of global consumption.
In such an environment, it becomes challenging for oil to trade sustainably above the US$60–70 per barrel range. If surplus conditions persist, meaningful downside remains on the table. Put simply, unless there is a major shock, the market is unlikely to need materially higher prices to clear supply. Instead, the balance of probabilities suggests a gradual drift lower as excess barrels continue to build.
Stabilising forces
While a surplus backdrop limits upside, it’s important to recognise that sharp downside moves often trigger relatively swift rebalancing mechanisms.
OPEC+ has been increasing production and reducing spare capacity, which paradoxically gives it greater scope to respond if prices correct sharply. With policy now more active, OPEC+ could pause planned increases or cut output to prevent destabilising price collapses.
US shale is the other key stabiliser. Accounting for roughly 10% of global supply, shale producers are uniquely agile compared to conventional operators. Given that a significant share of production from shale wells occurs in their first year, a slowdown in drilling can translate into lower supply within a short timeframe.
Economically, the market’s response function becomes clearer at lower price levels. Below around US$50 per barrel WTI (West Texas Intermediate – a major benchmark for crude oil prices), about a quarter of shale wells become loss-making.
Efficiency gains in recent years have pushed the average shale break-even lower, now sitting in the low US$40s – down from over US$50 per barrel previously. This suggests that if prices were to approach US$50 or fall below, a rapid cut in marginal supply would likely follow, helping to restore balance to the market.
Swing factor: geopolitics
Despite the surplus base case, geopolitical developments remain critical wildcards. The most immediate concern is Iran, where escalating tensions could significantly disrupt global oil flows.
Iran currently produces just over 3 million b/d and, despite sanctions, manages to export around 2 million barrels daily. More critically, roughly 20 million b/d – around 20% of global supply – transit through the Strait of Hormuz, which lies directly below Iran. Any disruption in this chokepoint would have significant market repercussions.
In the short term, these risks may keep oil prices elevated above what market fundamentals alone would suggest. However, such premiums are typically not sustained indefinitely. Over time, inventory levels and the supply-demand balance tend to reassert themselves.
Portfolio positioning
Given the expected surplus backdrop, we don’t hold a constructive near-term view on oil as an investment. That said, we continue to maintain modest energy exposure across portfolios as insurance against major unforeseen events, such as the geopolitical risks outlined above. Oil remains one of the few assets capable of repricing sharply in response to external shocks, and even small holdings can offer meaningful diversification in extreme scenarios.
Where we do invest, our bias is firmly towards quality. We favour companies with low operating costs, strong balance sheets and high free cash-flow generation – businesses that can remain resilient in a low oil price environment.
Chevron, which we hold in select global portfolios, is a good example. With a break-even cost below US$30 per barrel, it remains highly cash-generative even in a materially weaker price environment – offering resilience that many higher-cost producers cannot match.
Importantly, a low oil price environment tends to benefit the broader global economy – particularly for net importers like South Africa. As a result, we expect the rest of our portfolio to perform well in such a scenario, more than offsetting the modest cost of holding oil exposure as a hedge.
