By Avi Salzman

Oil prices are defying the odds right now, rising despite a near-certainty that the oil market will be oversupplied in a matter of weeks. Absent a geopolitical shock like an escalation between the U.S. and Iran, oil prices seem destined to fall in the coming weeks.

Brent crude, the international benchmark, rose on Thursday to $65.34 per barrel, up 8.5% from its 2025 lows -- despite a slew of recent bearish headlines. Stocks have held up too. In the past month, the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund has risen 6.6%.

OPEC and a group called OPEC+, which includes allied countries like Russia, are quickly ramping up oil production. They're planning to add more than 1.2 million barrels of additional supply to the market between May and July -- much more than expected just a few weeks ago. The production increase in just those three months is more than the total expected increase in global demand for 2025. And OPEC isn't the only supplier that's increasing production.

Major offshore oil projects in Brazil and Guyana are ramping up too. U.S. production also soared to a record in March, the latest month available. Global demand for oil has been OK, but not nearly robust enough to absorb all that planned production. The surplus could reach 2.6 million barrels a day in the fourth quarter, J.P. Morgan estimates. When oil production booms, and there isn't enough demand to sop it all up, prices tend to fall.

But not this time. The market has shown "remarkable resilience," wrote Natasha Kaneva, the head of global commodities strategy at J.P. Morgan. She sees a few explanations for that resilience. For one thing, fuel markets have stayed relatively strong, boosting margins for gasoline and diesel. And the oversupply hasn't shown up in inventory data yet. In fact, commercial crude supplies are relatively low.

"Healthy refinery margins are driving high utilization rates and boosting demand for prompt crude," Kaneva wrote.

The oil futures market is also trading in a relatively bullish pattern. For the next few months, futures are in so-called backwardation -- meaning that prices of futures contracts are steadily falling. That's positive for the market, because it signals there's strong demand to purchase oil today, and buyers don't want to wait. But as of May 2026, the oil market flips into contango, meaning future prices are higher -- a trend that tends to be more bearish. Not long from now, near-term oil prices will probably fall into contango, said Robert Yawger, director of energy futures at Mizuho Securities.

"If demand does not materialize it's not a good picture at all," he said. "It's in a dangerous spot here."

Yawger says there's one factor that could still send oil higher. The biggest wild card is the relationship between the U.S. and Iran. Talks between the two nations appear to be falling apart, and President Donald Trump's deadline for a resolution is approaching. If no deal is made, Iran's roughly 1.5 million barrels a day of oil exports could be at risk due to sanctions. If those barrels are taken off the market, prices could surge another $5 to $10 per barrel, Yawger estimates.

Write to Avi Salzman at avi.salzman@barrons.com

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June 05, 2025 17:07 ET (21:07 GMT)

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