With the peak driving season now over and the heating season yet to begin, now is an ideal time to take stock of the oil and gas market. Despite an encouraging rally between April and June in which a basket of major crudes gained an average 30%, it's been a disappointing summer for the energy resource. As of the time of writing on 24 September, Brent crude sits at $68.43 a barrel, which represents a 9% YTD decline. The continued output boosts by Saudi Arabia and the wider OPEC+ cartel don't bode well for future prices.
Unlike during the presidency of Joe Biden, this stagnation is not due to optimism surrounding green energy. Instead, it's a result of a deadly combination of oversupply and an uncertain demand landscape on account of geopolitical instability and global economic turmoil. With the trade war between the US and China still bubbling under the surface and enhanced sanctions against Venezuela and Iran on the way, the oil market is being pulled to and fro by opposing market forces. In this article, we'll seek to assess all of these factors and more as we plan to see where the market could be headed longer term.
An unpredictable world
It's been an ongoing theme for almost the past year now, but it seems as if the world is becoming an increasingly uncertain place with almost every passing week. Trump's tariff grandstanding and continued trade war with the world's second-largest economy, China, have seen a significant decline in industrial oil demand from Chinese manufacturing. At the same time, a "drill, baby, drill" standpoint when it comes to US-based oil production threatens to add to the existing oversupply problem. Thankfully, perhaps, US oil fields are shrinking and much of the investment being made is simply to maintain the same output as in previous years. Fatih Birol, head of the IEA, said since 2019 the oil industry has spent "nearly 90 per cent of annual investment" on oil and gas production, or about $500 billion a year, simply to stop the decline in existing fields.
This is largely due to the fact that most new oil deposits in the US are shale-based, which require higher oil prices to make financial sense. However, the White House's policies are luckily not only adding to the "staggering glut" reported by the IEA last year. Enhanced international sanctions against major producers Venezuela, Russia and Iran will work in the long term to stem the supply of cheap oil into the market. However, in the short term, Chinese and Indian refiners continue to stock up on crude from these countries before the penalties come into force. September's IEA report shows world oil demand up by 740,000 barrels per day year over year in 2025. However, observed global oil stocks rose by 26.5 million barrels in July for a full YTD gain of 187 million barrels, which will work to offset this demand increase and restrain any price increases.
OPEC the floodgates
As we discussed earlier, US oil fields are in need of much investment. However, even with a hugely pro-fossil president and Energy Secretary Chris Wright ordering a new study to bolster oil and gas development, the simple fact remains that US oil is much more expensive to extract and transport than deposits in many other countries. In the Middle East, the energy resource can be extracted with ease and is of a much higher grade than many US reserves. OPEC+, the cartel representing many of the region's producers, met on 7 September and agreed to a further output increase of 137,000 barrels per day. This comes after the group already increased production by 547,000 bpd in September, effectively ending a year ahead of schedule the voluntary cuts made in November 2023, which were originally due to be phased out by September 2026.
It's an open secret that the aim of the production ramp-up, led primarily by Saudi Arabia, is to regain lost market share from US shale, which generally requires per-barrel prices above $70 to be competitive. By flooding the market with cheap, high-quality oil, the hope is that the shale industry will eventually cut its losses and exit the market. In the IEA report referenced earlier, it was noted that as oil and gas fields decline, the world's fuel supplies will gradually become concentrated in the Middle East and Russia, whose giant fields decline more slowly. In this scenario, OPEC and Russia's market share could rise from around 43% today to more than 65% by 2050. This suggests that lower prices are likely to be the reality for the foreseeable future, barring a devastating black swan event, which, of course, cannot be ruled out under the current administration.
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