Posthaste: The biggest oil glut the world has ever seen is about to come ashore

Estimates put the supply of oil now floating in tankers on the world's oceans at 1 billion barrels. Photo by Tim Rue/Bloomberg

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Crude prices look set for a deeper plunge as signs grow that the world’s oil surplus is bigger than anyone expected.

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Estimates put the supply of oil now floating in tankers on the world’s oceans at 1 billion barrels. The last time it was this high was during the pandemic when a price war between Saudi Arabia and Russia sent Brent crude spiralling to US$30 a barrel, said Capital Economics.

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“This implies that an oil glut is on the horizon,” said Hamad Hussain, Capital’s climate and commodities economist.

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Last week, the International Energy Agency warned the oversupply of oil will be bigger than forecast, and said the excess was starting to accumulate on ocean-going tankers. It predicts that world oil supply will exceed demand by almost 4 million barrels a day in 2026, the biggest surplus ever on an annual basis.

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“Looking ahead, as the significant volumes of crude oil on water move onshore to major oil hubs, crude stocks look set to surge,” the IEA said.

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The surplus has been driven by a drop in demand and an increase in supply after OPEC+ unwound years of production cuts in a matter of months.

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The group of oil-producing nations has raised output by more than 1.5 million barrels a day since April, said Hussain. The oil exports of Saudi Arabia alone rose by 10 per cent in September.

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The oversupply has been masked in recent months by extraordinary stockpiling by China, but analysts question how long this will continue and how much the nation can absorb.

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“Beijing’s hoarding tendencies can’t last forever,” said Rory Johnston, an oil market analyst in Canada and founder of Commodity Context. In the bigger picture, China’s demand for oil has shrunk dramatically since it led the world in 2023.

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Western Texas Intermediate prices have slumped in recent months to below US$60, (It was at US$57 today), compared to a range of US$70 to US$80 in 2023-24, and highs of US$120 in 2022.

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But Capital Economics predicts the price could fall to US$46 by the end of next year as the full impact of OPEC+ production increases hit the market.

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“The most straightforward of economic concepts is driving this decline: There’s simply too much supply relative to how much the world is consuming,” said Johnston.

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Falling prices will eventually correct the market imbalance, he said, either by increasing demand or, more likely, by global producers pulling back.

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U.S. shale producers will probably be the first to blink, he said. The average oil price needed to drill a new well there is in the low US$60s, and projects have already been scrapped because they are unprofitable.

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Canadian oilsands production can get by on less, but it would still be tight. The Alberta Energy Regulator estimates the sustainable oil price at $50 to $78 per barrel.

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Johnston said the lower oil prices of the next year or so are likely temporary, an “echo” of the artificial tightness of 2023 and 2024.