Analysis: Gloomy Oil Outlooks for Producers, not Refiners


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- Growing supply risks have propelled oil prices to six-month 
highs this year, breaking the downward trend seen throughout the second half of 
2025.

   Market sentiment has turned bullish amid fears of a potential war between 
the U.S. and Iran. But without an exchange of fire or similar aggression, 
attention may return to bearish market fundamentals which point to oil 
oversupply and growing global inventories.

   According to major forecasting agencies, softening input prices for refiners 
may, bar major supply outages, be all but guaranteed.

   The International Energy Agency (IEA) estimates that oil stockpiles grew by 
an average 1.3 million bpd last year, the most since 2020, when the pandemic 
then severely slashed oil demand. In its latest monthly Oil Market Report 
published last week, the agency once again cut demand growth expectations for 
2026, from 930,000 bpd in its January forecast to 850,000 bpd.

   A similarly-sized adjustment to supply growth expectations led the IEA to 
forecast an average oil surplus of 3.7 million bpd this year, unchanged from 
last month. The forecasted oil-overhang, which is 500,000 bpd larger than 
Iran's entire crude oil output, could be even larger were prices to rise -- as 
higher returns encourage even more drilling.

   The IEA's demand growth forecast differs widely from that of the 
Organization of Petroleum Exporting Countries (OPEC). The Vienna-based OPEC 
expects global demand to grow by 1.38 million bpd in 2026.

   Supply growth expectations by the Paris-based IEA dwarf OPEC's bullish 
demand forecast by more than 1 million bpd. The IEA's projections are split 
equally between OPEC and non-OPEC countries and assumes those under OPEC will 
adhere to their allocated quotas.

   The Washington-based U.S. Energy Information Administration (EIA), 
meanwhile, expects demand growth at 1.2 million bpd this year, versus a global 
supply expansion of 1.5 million bpd. The EIA forecast is contained in its 
February Short-Term Energy Outlook. The data implies that inventories will grow 
at an even faster pace this year, at a rate of 3 million bpd, compared to 2.7 
million bpd in 2025.

   Elevated Margins to Continue

   Geopolitical and supply risks aside, crude prices are expected to be 
pressured by global production expansions.

   While fuel prices are likely to soften in tandem, they may do so at a much 
slower pace. Global refinery additions are slowing down, and major refining 
hubs such as the U.S. and Europe are set to continue losing refining capacity. 
Fuel inventories may swell on a global scale but stay relatively low in 
data-transparent markets like the U.S. and Europe. This combination of factors 
is likely to keep refining margins elevated.

   The EIA's latest forecast supports this view. The agency expects 16% to 18% 
lower average crude spot prices than in 2025, compared with a drop in wholesale 
gasoline and diesel prices of 7% and 11%, respectively. This implies even 
higher refining cracks than in the second half of last year, a trend that may 
well continue into 2027




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