BY RON BOUSSO
LONDON — A glaring mismatch between benchmark oil prices and expectations of a looming supply overhang has created an imbalance that could end badly for traders.
Major energy forecasting agencies, banks and producers expect oil supplies to far outstrip demand through the coming months and well into 2026 due to both an expected slowdown in demand growth and sharp production increases from OPEC+ and other major producers including the United States, Canada, Brazil and Argentina.
The International Energy Agency projects global oil production will climb by 2.5 million barrels per day to 105.5 million bpd in 2025, then by another 1.9 million bpd in 2026, with a whopping 4.1 million bpd jump expected for Q1 2026.
And the US Energy Information Administration also expects sizable stock builds this year and next.
Meanwhile, global consumption is expected to be only 103.74 million bpd this year and 104.44 million bpd next year.
In response, spot Brent crude prices LCOc1 have already softened, sliding from over $73 a barrel on July 30 to just under $66 this week, also reflecting the waning summer oil demand in the northern hemisphere.
But the longer end of the futures curve is telling a different story.
In the oil market – as in other big commodity spaces – participants can buy contracts for future delivery months or years ahead, letting producers, refiners, consumers and speculators either hedge or bet on price moves.
The forward curve reflects those expectations and comes in two flavours. Backwardation – when prompt prices sit above future prices – usually signals a tightening market and nudges producers to pump more. And contango – future prices above prompt levels – normally points to oversupply, incentivizing storage over drilling activity.
Given that a chorus of experts is calling for significant oversupply in today’s oil patch, you’d expect Brent’s forward curve to be steeply in contango through 2026.
Instead, it’s in pronounced backwardation from the prompt October contract out to March 2026, then largely flat to September 2026 before swinging into strong contango. The result: a forward curve “smile”.
That shape is rare and puzzling. If a sizeable overhang is indeed barrelling down on the market, traders would very likely need to store more crude in tanks or, in a pinch, even on ships in the coming months.
This means that a strong price correction may be coming. — Reuters
