Global oil markets are poised to close the year with their most significant annual price drop since the onset of the COVID-19 pandemic in 2020. The dominant themes of 2025 have been persistent geopolitical tensions and a steady climb in worldwide production, creating a punishing surplus that analysts warn will continue to weigh on the market into the next year.
A Year of Oversupply and Price Pressure
On Wednesday, Brent crude futures steadied above US$61 a barrel, a level that reflects a steep 17 per cent decline for the year. This downward trajectory sets the stage for the commodity's deepest annual loss in five years. The immediate focus for traders is a trifecta of market-moving events: an upcoming OPEC+ meeting this weekend, a bearish industry report from the United States, and the evolving policies of U.S. President Donald Trump toward major producers like Russia, Iran, and Venezuela.
The fundamental driver remains a clear imbalance between supply and demand. Both the International Energy Agency (IEA) and the U.S. government estimate that production has exceeded consumption by just over 2 million barrels per day in 2025, with forecasts indicating this surplus will worsen in the coming year.
Market Dynamics and Producer Strategies
The supply glut has been exacerbated by strategic shifts among traditional producers and new output from emerging regions. Earlier this year, OPEC+ roiled markets by reversing its long-standing policy of defending prices, instead choosing to raise output in a bid to reclaim market share. This move came as countries including Brazil and Guyana significantly boosted their supply, while the United States continued to pump oil at record levels. The producer cartel is now expected to hold off on further output hikes during its talks this weekend.
Despite the overall bearish sentiment, several factors have prevented an even steeper collapse in prices. Analysts note that a substantial portion of the excess crude has been absorbed into storage tanks in China, isolating it from the primary pricing hubs. In contrast, storage facilities in the West, particularly at the key Cushing, Oklahoma hub for West Texas Intermediate (WTI) futures, are heading for their lowest annual average inventory level since 2008.
Geopolitics and Economic Ripple Effects
The oil price slump presents a double-edged sword for the global economy. On one hand, the drop in crude has helped alleviate inflationary pressures, providing central bankers, including the U.S. Federal Reserve, with more room to maneuver. The Fed cut rates three times in 2025, with meeting minutes suggesting most officials viewed further reductions as appropriate. On the other hand, sustained lower prices threaten to reshape the budgets of major oil-producing nations and energy companies worldwide.
"The oil market is set to remain oversupplied into 2026, with strong non-OPEC production from the US, Brazil, Guyana and Argentina outpacing uneven global demand," said Kaynat Chainwala, an analyst at Kotak Securities Ltd. She added that prices should stay range-bound between US$50 and US$70, with risks related to Venezuelan or Russian supply offering some support.
Geopolitical events will continue to be a critical wildcard. The U.S. is actively involved in efforts to end the war in Ukraine, a resolution that could ease the logjam of Russian oil floating at sea. Concurrently, U.S. seizures of tankers carrying Venezuelan cargo have forced the South American nation to curtail output. Furthermore, President Trump's recent statement that he would strike Iran again if it rebuilds its nuclear program adds another layer of uncertainty, reminiscent of the price spike above $80 seen earlier in the year following U.S. authorized attacks.
