We’re headed for a historic supply-demand gap in oil markets, the size of which has only been seen twice since the mid-nineteenth century, when the oil industry was born. A report this week from the World Bank has set off alarm bells about a coming oil glut that has the potential to seriously disrupt global economics and trade patterns.
"Next year, the global oil supply is expected to exceed demand by an average of 1.2 million barrels per day," World Bank stated in its latest Commodity Markets Outlook report. The scale of this oversupply is difficult to overstate; these numbers have only been exceeded twice in history, in 1998 and 2020. As a result, a barrel of oil could cost less than $60 within the next six years.
The oversupply is due to the confluence of a number of discrete factors including flatlined economic growth in China, climbing electric vehicles sales (which will exceed 23% of new vehicle sales this year, and reach 40 million cars in 2030), increasing use of trucks powered by liquefied natural gas, projected production bumps from non-OPEC+ nations, and persistent overproduction from OPEC+ members as well, who are currently pumping out an extra 7 million barrels per day, “almost double the amount on the eve of the pandemic in 2019” according to a World Bank blog post accompanying the bombshell report.
While this spells a lot of economic uncertainty and turmoil in the coming year, it could also serve as an important force of market correction in the context of intensifying conflict in the middle east, particularly where commodity prices are concerned. “This new reality might keep a lid on consumer energy prices even as geopolitical strife intensifies, Axios reported earlier this week. “It could also wreak havoc on the longstanding economics that underpin oil production.”
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This market fluctuation could provide some real relief to consumers in the near term, who are still feeling the squeeze of blistering post-pandemic inflation rates. The World Bank warns that commodity prices will not sink as low as pre-pandemic levels, but they are projected to hit a five-year low, with major dips in prices at the gas pumps and in grocery stores. Prices are expected by fall 10% as soon as 2026. This could be a lifeline for many families who are teetering at or who have fallen below the poverty line thanks to the runaway commodities prices of the last five years.
While this is cause for celebration for the average citizen in the developed world, however, the outlook is considerably less rosy for those living in poorer countries. “Falling commodity prices and better supply conditions can provide a buffer against geopolitical shocks,” said Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President. “But they will do little to alleviate the pain of high food prices in developing countries where food-price inflation is double the norm in advanced economies. High prices, conflict, extreme weather, and other shocks have made more than 725 million people food insecure in 2024.”
And then there are the oil and gas companies, that are staring down the barrel of a decade of uncertainty, volatility, and declining revenues. "[The World Bank] report's projections, based on the latest data, show a major supply surplus emerging this decade, suggesting that oil companies may want to make sure their business strategies and plans are prepared for the changes taking place," said International Energy Agency Executive Director Fatih Birol in a statement.
The outlook is grim for supermajors, even those that have worked hard to diversify their portfolios and brace for such a downturn. As Reuters reports, “better to drill for investment ideas elsewhere.”
By Haley Zaremba for Oilprice.com