Oil Market Outlook Shifts to Oversupply as J.P. Morgan Projects Lower Prices
J.P. Morgan Research, under the guidance of Natasha Kaneva, Head of Global Commodities Strategy, has issued a warning regarding a significant global oil market surplus that is anticipated to be the primary driver of crude prices through 2025 and 2026. The firm maintains its projections for Brent crude to average $66 per barrel (bbl) for 2025 and $58/bbl for 2026, underscoring a bearish outlook despite recent market dynamics.
Detailing the Supply and Demand Imbalance
The forecast for lower oil prices is predicated on evolving supply-demand fundamentals. J.P. Morgan's analysis indicates that global oil demand is projected to expand by 800 thousand barrels per day (kbd) in 2025, a reduction of 300 kbd from previous estimates. Concurrently, global supply is set to increase. Notably, OPEC+ boosted crude production by 411,000 barrels per day in June, reportedly to ensure member adherence to quotas. This shift in OPEC's "reaction function," which prioritizes increasing supply to maximize revenue, is seen by Kaneva as a significant bearish argument, largely overlooked by the market. The efficacy of supply cuts in influencing prices has diminished, from a $10 impact in 2023 to an anticipated $4 impact in 2025 for a 1 million barrels per day (mbd) reduction, suggesting a strategic pivot by oil-producing nations.
Several OPEC members are actively expanding their production capabilities. The United Arab Emirates (UAE) is investing in new capacity, aiming for an incremental increase of approximately 200 kbd annually in 2025 and 2026. Kazakhstan has deployed nearly 200 kbd of new production capacity, while Iraq is enhancing refining capabilities and Kuwait is modestly increasing output. Production in the Saudi-Kuwaiti Neutral Zone is also trending 40 kbd higher in 2025. These collective increases, funded significantly by international oil companies, contribute to the looming surplus.
Market Reaction Amidst Conflicting Pressures
The anticipated oversupply has profound implications for market participants. While the immediate catalyst for rising prices due to higher steel costs from tariffs remains a factor, the overarching narrative points to downward price pressure. The U.S. Energy Information Administration (EIA) projects a 0.6% year-on-year decline in U.S. gasoline consumption in Q4 2025, driven by weakened consumer confidence and broader economic uncertainties. Although diesel and jet fuel demand have seen increases, they do not offset the overall dampening effect. The EIA also forecasts U.S. crude oil production to peak at 13.6 million bpd in December 2025 before declining to 13.3 million bpd in 2026, a consequence of lower prices impacting drilling activity.
Adding to the complexities, the offshore oil and gas industry faces significant cost pressures. Expanded Section 232 tariffs on steel and aluminum, effective February 2025, have driven up input costs. Prices for steel pipes, critical for well completions, jumped 15-25% shortly after the tariffs were announced. For deepwater Gulf of Mexico projects, a 25% steel price hike could add $1 million to $2 million per well, squeezing margins for operators like Chevron and bp and adding 2-5% to overall project expenses.
Broader Context and Sector Implications
Reinforcing J.P. Morgan's outlook, the International Energy Agency (IEA) reported global oil supply reached a record 106.9 million barrels per day (bpd) in August 2025, driven by OPEC+ unwinding production cuts and robust output from non-OPEC+ nations. The IEA further expects a record oil surplus of more than three million barrels per day in 2026. Similarly, analysts at HSBC, led by Kim Fustier, anticipate a "big surplus" from the fourth quarter onwards, growing from 600,000 bpd in Q2 to 1.7 mbpd in Q4 2025 and 2.4 mbpd in 2026.
This oversupply, coupled with weakening demand in OECD nations, is pushing crude prices lower, with the EIA forecasting an average Brent crude price of $59 per barrel in Q4 2025, a significant drop from $81 in 2024. The White House has expressed a strong preference for reducing crude prices to $50/bbl or lower, although intervention is not expected unless WTI crude falls below this threshold, typically the point where shale production begins to decline.
The energy sector has already begun to reflect these pressures. For Q2 2025, the sector reported the largest earnings decline among S&P 500 sectors, with a -24.0% drop in earnings, primarily due to a 21% decrease in average oil prices compared to Q2 2024. Integrated Oil & Gas (-34%) and Oil & Gas Exploration & Production (-20%) sub-sectors were particularly impacted. While a modest -3.0% earnings decline is projected for Q3 2025, a turnaround is anticipated in Q4 2025, with companies like Chevron showing optimism for production growth in the Permian Basin and cost efficiencies post-acquisition, projecting a 19.5% increase in 2026 EPS to $9.35 from an estimated $7.83 in 2025.
Expert Commentary and Forward-Looking Outlook
"The oil market is oversupplied and could absorb significant disruptions," noted HSBC's Kim Fustier, highlighting the market's capacity to handle potential geopolitical events that might otherwise drive prices higher, such as recent Ukrainian drone strikes on Russian energy infrastructure.
Despite the prevailing surplus narrative, geopolitical tensions, including potential tighter Western sanctions on Russian energy exports, could provide a floor for oil prices. Investors are also closely watching central bank policies. The market has largely priced in a 25-basis-point interest rate cut by the Federal Reserve, with Marc Giannoni, chief U.S. economist for Barclays, suggesting the Federal Open Market Committee (FOMC) will likely assess rising downside risks to its employment mandate amidst moderate inflation. While rate cuts typically benefit the stock market, concerns about the risk of stagflation could introduce volatility, particularly in the energy sector.
The trajectory for the global oil market in the coming years appears to be defined by robust supply growth outpacing more subdued demand expansion. Market participants will need to closely monitor OPEC+ production strategies, global economic indicators influencing demand, and geopolitical developments, all while navigating the complexities of rising operational costs in the upstream sector.
Edgen Stock·Sep 19 2025, 21:25