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Welcome to Dispatch Energy! Much ink has been spilled on speculating whether the global demand for petroleum will peak before the end of the decade, but this fixation on long-term forecasting obscures a very real transition already underway. The oil market is currently experiencing a remarkable shift from a multi-year stretch of oil supply deficits to a broadly anticipated surplus—what some market participants are calling the “most anticipated oil glut” in the history of the industry.
Oil Market Downshifting
An oil pumpjack pumps crude from the ground near Luling, Texas. (Photo by Dave Creaney/Anadolu Agency via Getty Images)
To understand these coming shifts, we must first take a look at the key features of the oil market today. First, the price of oil is under downward pressure. A barrel of U.S. benchmark West Texas Intermediate (WTI) crude is now fetching less than $60 compared to the $70 to $80 it commanded through most of 2023-2024 and the average price of nearly $100 in 2022 (with a high of more than $120). The most straightforward of economic concepts is driving this decline: There’s simply too much supply relative to how much the world is consuming.
Next, production is growing far faster than consumption, widening the gap between supply and demand ever further. Production is relatively strong due to both 1) strong non-OPEC growth in the U.S., Canada, Brazil, and Guyana, and, more acutely, 2) the decision by OPEC and other major oil producers, known as OPEC+, to rapidly unwind multiple years’ worth of very large production cuts in a matter of months. Global demand growth, meanwhile, has slowed notably. As a result, a supply surplus is already beginning to flow into global storage tanks. In order to correct this market imbalance, prices will need to fall until they either stimulate faster demand growth or, more likely, push global oil producers to pull back.
And it is the U.S. shale patch producers that are most likely to quickly respond to this price signal by cutting investment, which would in due course push U.S. crude production into decline. U.S. shale producers benefit from an investment-to-production timeline that can be measured in months instead of the years—or even decades—common across much of the rest of the industry.
Meanwhile, the Trump administration has sent the industry mixed signals. Throughout his 2024 campaign, President Donald Trump vowed to “drill, baby, drill.” Since taking office, however, he has relished plunging prices that will achieve quite the opposite. American presidents have always taken a keen interest in keeping pump prices low; research shows that gasoline prices are negatively correlated with presidential approval ratings. But Trump has been particularly pump-price obsessed and, just last week, took credit for low consumer prices, specifically citing the fall of crude below $60 per barrel.
Trump has also gone to great lengths—to the extent a president can—to push prices lower: from urging OPEC to hike production during his first week in office to neglecting (or proving unable) to more firmly clamp down on Iran’s crude exports to falling behind European allies in tightening the screws on Russia’s oil industry.
How did we get here?
The oil market experienced a period of protracted supply deficits between 2021 and 2024, as the world rebounded from the unprecedented COVID demand shock. In 2021-2022, deficits were driven by resurgent demand, as the world emerged from lockdowns, and insufficient supply.
On the supply side, global producers were still reeling from the historic collapse in oil prices. OPEC and allied exporters, including Russia, had cut nearly 10 percent of global oil supply in 2020 and were struggling to increase production given underinvestment and acute supply chain bottlenecks. Similarly, U.S. producers proved unable to immediately increase output as they had done in the past.
To make matters worse, the market received another unexpected shock when Russia invaded Ukraine in early 2022. This immediately put Russia’s vast oil exports in danger of Western sanctions and prompted the International Energy Agency (IEA) in April 2022 to publish a forecast that anticipated the unprecedented loss of 3 million daily barrels of Russian oil, or roughly 3 percent of global supply.
These global developments translated into pain at the gas pump. The price of a barrel of crude oil rocketed higher through 2022 to the highest level since 2008, with WTI briefly rising above $120 per barrel. Worse still for American motorists was a parallel crisis in the global refining industry, which created a crude distillation bottleneck. Gasoline prices were driven up to the wholesale equivalent of more than $170 and diesel prices to more than $210 per barrel at their peak in the summer of 2022. At the retail pump, U.S. drivers had to shell out nearly $5.50 per gallon of gasoline, while the U.S. trucking fleet was forced to pay almost $5.80 per gallon of diesel.
The higher prices did exactly what higher prices are meant to do: They stimulated supply and dampened demand. Supply received an additional boost from the Biden administration’s largest-ever release from the Strategic Petroleum Reserve while demand was further gutted by China’s zero-COVID lockdowns, the economic and mobility consequences of which dragged through early 2023. Unsurprisingly, the market loosened and prices fell from more than $100 per barrel in the summer of 2022 to less than $80 per barrel by the end of the year.
But in an attempt to stabilize the oil market at higher prices, OPEC+ in October 2022 announced plans to cut production again—almost immediately after unwinding its emergency COVID production cuts in August 2022. The organization continued to cut production through 2023 and entered 2025 with nearly 6 million daily barrels in production cuts on the books, amounting to about 60 percent of the volume cut in 2020. These supply cuts, indeed, kept global oil markets broadly undersupplied through 2023 and 2024 and, therefore, prices higher.
The obvious challenge for OPEC was that these cuts represented foregone revenue as the producer group shed market share to its competitors, while those higher prices did, eventually, stimulate more robust non-OPEC supply growth. All the while, global demand growth continued to slow and the market weakened once again, even with the exceptional level of OPEC+ production support. Cracks also began to emerge within the OPEC+ alliance as producers—most notably Kazakhstan, but also Iraq, Russia, the United Arab Emirates, and Kuwait to varying degrees—broke ranks to overproduce their allotted quotas.
In late 2024, OPEC+ leadership decided that enough was enough: Its aspirations for higher prices were unsustainable. The producer group decided to begin easing those cuts back into the market as a steady trickle, starting with 2.5 million barrels per day over 18 months, or roughly 139,000 barrels per day of additional supply each month. But after multiple delays, the easing was accelerated to return to the full 2.5 million daily barrels in only six short months, by the end of this past September. The exact reason for this acceleration is still actively debated within the industry, but it was likely a combination of ongoing quota cheating among the membership and a rip-off-the-Band-Aid mentality. This month, OPEC+ began the process of reversing another cut of 1.65 million barrels per day, moves that are currently expected to continue through September 2026.
Are we in market surplus now?
Oil markets likely flipped into surplus this past summer. However, the effect on prices has been postponed by China’s decision to embark upon a heavy bout of strategic stockpiling. Still, Beijing’s hoarding tendencies can’t last forever, and more structurally, China remains a drag on demand after falling from the world’s consistently largest source of demand growth—China accounted for more than 60 percent of total global oil demand growth between 2013 and 2023—to a far slower, arguably flat demand profile over recent years.
The IEA’s latest forecast includes an exceptionally large surplus in 2026, even larger than in 2020, unless something changes. Of course, something most likely will change: Lower prices may force a faster decline in non-OPEC supplies, a rebound in moribund demand growth, or OPEC+ to backtrack on production hikes. Nonetheless, it’s certainly fair to say that relative to where prices stand today, there’s a greater likelihood of lower than higher prices over the next year.
This downside risk—together with price declines more broadly—is obviously bad for the American oil industry and, given the prolific rise of U.S. oil production following the shale revolution that began bearing fruit in the early 2010s, it is bad for large parts of the overall U.S. economy. And it’s a relatively new situation. In the mid-2000s, the U.S. was a net importer of more than 10 million daily barrels of crude oil, so this price decline would have been an unambiguous stimulant for the economy. Instead, the U.S. is the world’s largest exporter of crude and petroleum products today, so this price decline slashes the value of those exports.
The latest U.S. production cost estimates from the Dallas Federal Reserve Bank put the average price needed to profitably drill a new oil well in the low $60s per barrel, and plenty of projects have already been scrapped as unprofitable. Oil drilling rig counts have fallen precipitously since April, on the heels of Trump’s “Liberation Day” tariffs announcement and OPEC+’s acceleration of production hikes. This isn’t to say that the U.S. is running out of oil; there’s still plenty trapped in the shale basins across Texas. Rather, the U.S. is running short on profitable oil prospects at this price—a function of economics rather than geologic fate.
Lower oil prices will bring with them a necessary supply-demand correction in an oil market that has, for the past few years, been kept artificially tight by explicit OPEC+ production policy decisions. That will be painful for global producers but a windfall for global consumers. Still, it will be important to remember that the low prices realized over the next year or so are themselves likely temporary, an echo of the artificial tightness experienced in 2023 and 2024.
Only after OPEC+ production has normalized and a new market equilibrium is established will we begin to get a firmer sense of what the end of the decade—and perhaps the end of oil demand growth itself—will look like for the global oil industry.
SCOTUS ruled but the Army Corps won’t listen.
The Supreme Court’s ruling in Sackett v. EPA was clear: The Clean Water Act covers only traditionally recognizable bodies of water—like rivers, lakes, and streams. “Wetlands” qualify only if they share a continuous surface connection to those waters. Yet the U.S. Army Corps of Engineers keeps ignoring the Court’s ruling, imposing harsh restrictions on private property and ensnaring Americans like Dr. Sedigheh Zolfaghari in red tape.
Policy Watch
Last week, the U.S. Treasury Department’s Office of Foreign Assets Control announced plans to intensify its “efforts against Iran’s petroleum and petrochemical exports by sanctioning over 50 individuals, entities, and vessels that facilitate” the Islamic Republic’s oil trade, including yet more specific Chinese terminals and refineries. These are the fourth such sanctions of Trump’s second term and add to the ever-growing list of American economic penalties on Iran. These measures will, no doubt, complicate logistics for China, the primary buyer of Iranian oil; however, Iranian oil exports continue to hover around their highest levels in seven years despite these mounting restrictions.
Late last month, the Department of Justice sided with Enbridge—a major Canadian oil and gas pipeline and transportation company—in its attempt to fight Michigan’s decision to terminate the easement that allowed the Line 5 pipeline to traverse the Straits of Mackinac, which would force the end of operations on the line. The pipeline carries more than 500,000 barrels per day of crude and other petroleum products to the Midwest and then back up into Canada. Michigan Gov. Gretchen Whitmer has attempted to close the pipeline for fear of a “catastrophic oil spill” in the Straits, which connect Lake Michigan and Lake Huron. The DOJ filed a statement of interest stressing the federal government’s jurisdiction in pipeline regulation, adding that the closure of the pipeline would violate a preexisting treaty with Canada that specifically guarantees unobstructed pipeline flow. Separately, a U.S. administrative judge is expected to rule by the end of the year on whether or not a planned rerouting of the same pipeline around the Bad River tribe’s reservation in Wisconsin can move forward.
Innovation Spotlight
There’s an industry-wide race to better track global emissions independently and in real time using a combination of satellite-based techniques and more direct flyover estimations. The goal: to both guide policy and keep industry honest. These efforts have borne fruit, according to a new report by S&P Global Commodity Insights (SPGCI), which notes that, after years of rising methane emissions in America’s prolific Permian Basin, those emissions appear to have peaked and begun to fall shortly after overflight estimation data was made more widely available in 2022. This absolute emissions decline, as SPGCI notes, occurred during a period when overall production in the Permian Basin continued to rise, indicating an even faster decline in emissions intensity—meaning, in other words, that much less methane was released per barrel of oil produced in 2024 compared to 2022, thanks to industry efforts to reduce leaks.
Further Reading
Despite early indications of withering oilfield investment and a pullback in drilling activity, U.S. crude oil production has continued to reach fresh all-time highs through this past summer thanks to the months-long lag between investment decisions and changes to output. But U.S. producers are about to face a rude awakening, Ed Crooks predicts in his Energy Pulse blog. “Video game designers use a concept called ‘coyote time’: allowing characters to walk on air for a short time before gravity asserts itself and they fall to earth. This year, it has felt like the U.S. oil industry has been operating on coyote time,” he wrote. The industry consultant is projecting that we will only see U.S. crude oil production begin to plateau in the final quarter of this year, with the outlook for U.S. production growth next year indicating a contraction unless prices rebound soon.
As discussed above, much of the resilience in recent global crude pricing is reliant on China’s seemingly voracious appetite to build its strategic crude stocks, which vacuumed up nearly 1 million barrels per day, on average, through the second quarter of 2025. In Commodity Context, I outline the underlying cause: an acute sense of energy insecurity in China. Energy insecurity driven by an overwhelming dependence on foreign energy imports is driving Chinese policymakers to build out sizable strategic reserves (similar to U.S. policymaking in the 1970s). But despite supporting the market in the short term, this energy security obsession is also putting the brakes on Chinese petroleum product demand growth as EV sales rise. Ultimately, the bearish drag of domestic petroleum consumption substitution will be more durable than the inherently finite build-up in strategic stockpiles, no matter how much longer these reserve-building efforts continue in the short term.
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