Geopolitical Risk Supports Oil as Supply Surplus Looms
The WTI prompt-month contract rose $0.82 on the week to settle at $62.69/Bbl on Friday as markets priced in a renewed geopolitical risk premium amid escalating global tensions. Traders weighed supply disruption risks against an increasingly bearish supply-demand outlook.
Ukrainian drone attacks temporarily shut operations at Primorsk and three pumping stations feeding Russia’s Ust-Luga terminal. Kyiv has intensified its campaign against Russian energy assets in recent weeks to restrict Moscow’s fuel supply to the front lines and reduce export revenues. The US is also expected to press G7 allies to impose tariffs of up to 100% on Russian oil purchases by China and India, further heightening the geopolitical backdrop.
Despite these near-term risks, fundamentals remain broadly bearish. In its latest Short-Term Energy Outlook (STEO), the EIA projected significant global inventory builds through late 2025 and into 2026, keeping sustained downward pressure on prices. While the agency nudged its 2025 WTI forecast slightly higher to $64.16/Bbl, it maintained a much lower 2026 projection of $47.77/Bbl, signaling expectations for prolonged oversupply.
That view was reinforced this week as OPEC+ added fresh barrels back to the market, approving a 137 MBbl/d production quota increase for October, the first step in reviving the 1.66 MMBbl/d tranche that had been paused since April 2023. The group has signaled that future increases will depend on “evolving market conditions,” but the decision underscores its focus on market share, even at the risk of pressuring prices lower.
The IEA echoed this view, raising its forecast for the 2026 surplus and now projecting global supply to outpace consumption by 3.33 MMBbl/d, 360 MBbl/d more than its August estimate, and warning of a near 4 MMBbl/d glut in 1H 2026. Citi described the market as a “tug-of-war between increasingly bearish fundamentals and heightened political risks,” keeping its Brent forecast anchored in the low $60s.
This week’s developments highlight the tension between near-term geopolitical risks and an increasingly bearish supply-demand setup. While drone strikes and tariff threats may support prices in the short run, the projected 2026 surplus suggests downside risk remains the dominant theme heading into 4Q. AEGIS maintains a cautiously bearish outlook.
Crude Oil Factors
Geopolitical Risk Premium. (Bullish, Mostly Priced In) President Trump is pushing for a summit between Vladimir Putin and Volodymyr Zelensky following a series of high-level talks. Vandana Hari of Vanda Insights said crude “may be in for a holding pattern,” noting that while the path to a resolution has opened, it could take time. A peace deal could eventually ease restrictions on Russian crude exports, though Moscow has largely maintained flows throughout the conflict.
Speculator Positioning (Bearish, Priced In) The latest CFTC data show that as of August 12, money managers reduced their net long in CME’s flagship NYMEX WTI contract to just 48,865 contracts, the smallest bullish position since April 2009. Meanwhile, trades of WTI done on the ICE exchange show money managers holding a net short of about 53,000 contracts. When the two venues are combined, overall positioning in WTI has slipped into net short territory for the first time on record.
OPEC Market Share War. (Bearish, Surprise)OPEC+ announced it will raise the group’s production quota by 137 MBbl/d for October, marking the start of unwinding 1.66 MMBbl/d of voluntary cuts that were originally planned to stay in place through the end of 2026.
Oil/Product Inventories. (Bullish, Priced In) The latest EIA report leaned bearish as well, showing a surprise build in commercial crude inventories of roughly 600 MBbls and a 2.1 MMBbl increase at Cushing, which pushed stocks at the hub to their highest level since early May and pressured prompt-month spreads. Product demand indicators were softer, with total refined product supplied running nearly 2% below the same week last year, and exports slipped to about 3.55 MMBbl/d after several weeks of strength, signaling a weaker pull from international buyers.
OPEC+ Quotas. (Bullish, Priced In) On June 2, OPEC+ announced its extension of 3.66 MMBbl/d cuts through December 2025. Additionally, the 2.2 MMBbl/d voluntary cuts from eight member countries will continue into Q3 2024 but will start to be reversed in October at a rate of 0.18 MMBbl/d per month. OPEC+ members agreed on September 5 to delay a planned gradual 2.2 MMBbl/d supply hike by two months, shifting the start to December. The group will add 0.19 MMBbl/d in December and 0.21 MMBbl/d from January onwards, with an option to adjust or pause these hikes depending on market conditions. The cartel also reaffirmed its compensation cuts of 0.2 MMBbl/d per month through November 2025, as members such as Iraq, Russia, and Kazakhstan have struggled to meet their original production quotas.
AEGIS notes that the global crude market would quickly build inventories without OPEC's support in reducing supply.
OPEC Unwind. (Bearish, Mostly Priced in) OPEC+ announced a 547 MBbl/d production quota increase for the month of September, completing the reversal of the group’s November 2023 supply cuts a full year ahead of schedule. The move brings the total unwind to approximately 2.5 MMBbl/d, including the 300 MBbl/d hike allocated to the UAE.
China Demand. (Bearish, Priced In) China’s behavior remains the key wild card. Goldman Sachs expects Beijing to continue filling commercial and strategic tanks through 2026, projecting inventory builds of 500 MBbl/d over the next five quarters. Analysts note that without renewed Chinese stockpiling, OECD inventories could swell noticeably as new OPEC+ and non-OPEC supply hits the market.
USD (Bullish, Priced In) The US dollar index surged to multi-year highs toward the end of 2024. The dollar has since erased all post-election gains despite tariff fears being realized. Typically, a stronger dollar will have a negative impact on crude prices, while a weakening dollar will support prices.
Ukraine-Russia Resolution. (Bearish, Surprise) President Trump is pushing for a summit between Vladimir Putin and Volodymyr Zelensky following a series of high-level talks. Vandana Hari of Vanda Insights said crude “may be in for a holding pattern,” noting that while the path to a resolution has opened, it could take time. A peace deal could eventually ease restrictions on Russian crude exports, though Moscow has largely maintained flows throughout the conflict.
Trade War. (Bearish, Mostly Priced In) A federal appeals court ruled that most of President Trump’s global tariffs were illegal, saying he exceeded his authority. The decision adds uncertainty over the tariffs’ future, and while the Trump administration looks to appeal the decision the ruling is set to take effect on October 14 unless overturned, which has raised hopes for stronger economic growth.
Projected Oversupply. (Bearish, Mostly Surprise) According to the EIA, global oil inventories are expected to rise by an average of 1.7 MMBbl/d in 2025, followed by a slightly slower but still significant 1.6 MMBbl/d increase in 2026. The most aggressive builds are forecast for 4Q 2025 and 1Q 2026, when inventories are projected to swell by 2.3 MMBbl/d on average.
Trump/Iran/Venezuela. (Bullish, Surprise) The US government has sent several ships off the coast of Venezuela prompting speculation that the Trump administration may be seeking to push Venezuelan President Nicolas Maduro from power. Tensions rose after the US sent fighter jets to the Carribean after two Venezuelan military aricraft flew over an American naval vessel in the area.
Russian Supply. (Bullish, Surprise) Ukrainian drone attacks temporarily shut operations at Primorsk and three pumping stations feeding Russia’s Ust-Luga terminal. Kyiv has intensified its campaign against Russian energy assets in recent weeks to restrict Moscow’s fuel supply to the front lines and reduce export revenues. The U.S. is also expected to press G7 allies to impose tariffs of up to 100% on Russian oil purchases by China and India, further heightening the geopolitical backdrop.
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