Oil’s Rocky Road Ahead: Short-Term Pain and Long-Term Potential

For anyone watching the energy markets, oil’s journey in 2025 has been anything but dull. After holding steady above $60 a barrel for much of the year, West Texas Intermediate (WTI) oil recently broke below that psychological threshold. While WTI is back above $60 on the back of new Russian sanctions, the recent drop renewed debate among analysts, investors, and everyday consumers about what comes next. Here, we’ll break down the factors at play and explore why near-term pain in oil might just set up longer-term gains.

OPEC+ production and market dynamics

When OPEC+[i] announced in April that it was lifting voluntary production cuts, most oil pundits turned bearish, believing crude oil prices would slip into the $50s before summer and potentially fall into the $40-$50 range in the second half of 2025. Instead, a combination of elevated geopolitical risk, strong demand, and low OECD[ii] inventories kept oil prices above $60.

Recently, however, the tides have started to turn. With demand for OPEC+ oil waning, the production surge has hit exports. The oil market has moved into “contango”—a situation where future oil prices are higher than current prices—signaling expectations of persistent oversupply for the next 12 to 18 months.

Despite the bearish outlook for oil prices, we believe there’s more to the story. While it’s likely oil prices will weaken into the $50s and remain low into early 2026, we anticipate a slow recovery next year. Our view is in contrast to those who expect a more prolonged downturn in oil prices. We see several factors that support our more constructive view, outlined below.

Inventories not building as expected

The International Energy Agency (IEA) predicts the increase in OPEC+ supply will result in a surplus of 5 million barrels per day in the first half of 2026.[iii] Assuming 20% of this surplus lands in the US, it would increase US inventories by about 180 million barrels—the largest increase in oil inventories ever observed. If this supply materializes, oil prices could fall into the low $40s, in our view.

However, we haven’t seen the OPEC+ production increase show up in US inventories, which remain near multi-year lows, or OECD inventories, which have been flat compared to last year. Instead, much of the supply increase has ended up in China, with seaborne exports to China up to an estimated 1.65 million barrels/day since April.[iv] While OPEC appears to see the increase in Chinese imports as a sign of strong demand, most of this oil is being stored in a strategic reserve.

Source: DOE, Bloomberg, as of 10 October 2025.
The chart presented above is shown for illustrative purposes only.

US production and sentiment

US oil production has been relatively stable throughout the year, rising only 345,000 barrels/day since the end of 2023. Shale producers have shifted their focus from production to growing free cash flow as they exhaust their top-tier drilling locations. Stable prices for most of 2025 kept drilling activity relatively flat, but the number of active fracking operations is down 13% since the beginning of the year. We expect production to continue to decline with lower prices as companies seek to avoid outspending cash flow.

Meanwhile, market sentiment toward oil has rarely been worse. The net long position on WTI crude oil remains at a record low, with long positions down 30% year to date and short positions up 28% year to date.[v] With sentiment this weak, it surprises us that crude oil prices aren’t lower. Long positioning at this low level typically signals a bottom in crude, but we think prices can still go lower from here. However, the pace of declines could be slow given the already bearish sentiment.

Source: EIA, as of 10 October 2025.
The chart presented above is shown for illustrative purposes only.

OPEC+ spare capacity may be lower than you think

Official OPEC spare capacity stands at 4.4 million barrels/day. But in reality, many member nations cannot produce at the stated capacity level. Even Saudi Arabia has never sustained production above 10.5 million barrels/day for any meaningful period, despite its official capacity of 11.84 million barrels/day. This suggests actual spare capacity may be lower than many think. We estimate total OPEC spare capacity would be only 1.9 million barrels/day. For a market producing 105 million barrels/day, this is a very small amount of spare capacity, in our view. If actual spare capacity is lower than advertised, it leaves the market with less cushion in the event of disruptions—a factor that we believe could support prices longer term.

Source: Bloomberg, Loomis Sayles estimates for adjusted spare capacity, as of 30 September 2025.
The chart presented above is shown for illustrative purposes only.

Oil in transit doesn’t equate to a surplus

In the wake of the Russia-Ukraine war, the amount of oil in transit has increased considerably. There are now a record 1.3 billion barrels of oil a sea due to the long shipment time from Russia to China.[vi] While many see this as a sign of oversupply that could contribute to lower oil prices, it’s more a result of sanctions and logistics than a true market surplus, in our view. We think this nuance matters when assessing future price risks.

Russian sanctions remind investors about geopolitical risk

Up until recently, Russia had generally avoided sanctions restricting its oil exports, which total approximately 7.3 million barrels/day. However, on 22 October, the US imposed new sanctions on Russian oil companies Rosneft and Lukoil after unsuccessful negotiations. Despite these measures, Rystad Energy estimates the sanctions will only affect 500,000 to 600,00 barrels per day, which should help Russia maintain its market access. This development highlights the oil market’s vulnerability to geopolitical risks and introduces additional, unpredictable upside potential for oil prices.

Patience is key

We anticipate volatility and weakness in the oil market over the near term, especially in light of current geopolitical risks. However, we expect oil prices to begin a slow recovery in the second half of 2026 as the market absorbs OPEC spare capacity amid stagnating shale production and a lack of non-OPEC production growth. For consumers, investors and anyone interested in the energy sector, the key is to stay informed and watch the data.

[i] OPEC+ is a coalition of 23 oil-producing countries that includes the 12 members of the Organization of the Petroleum Exporting Countries (OPEC) and 11 non-OPEC allies.

[ii] OECD is the Organization for Economic Co-operation and Development, an intergovernmental organization founded to stimulate economic progress and world trade.

[iii] International Energy Agency, Toril Bosoni, “As oil market surplus keeps rising, something’s got to give,” 17 October 2025.

[iv] Loomis Sayles estimate, based on Rystad Energy tanker data.

[v] Source: CFTC - Bloomberg, as of 23 September 2025 (the most recent available due to the US government shutdown).

[vi] Source: Bloomberg, Julian Lee, “Oil’s Billion-Barrel Sea Surplus Expands as Output Swells,” 20 October 2025.

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