MW Why 2025 has been such a historic year for oil - with prices set to finish near a 5-year low

By Myra P. Saefong

A number of factors made this year a particularly unique one for oil

OPEC+ policy acted as an "accelerant, rather than the sole driver," for oil's losses this year, said Rebecca Babin of CIBC Private Wealth.

The world has more oil than it needs, but a drop in crude prices this week to the lowest level in nearly five years may help slow production and boost demand - potentially eating into a supply surplus that was expected to grow in 2026.

"Current prices are unsustainable, and we're seeing [drilling] rigs drop and demand rise already," said Josh Young, chief investment officer of oil-and-gas investment firm Bison Interests. The number of active U.S. rigs drilling for oil was down about 14% compared to a year ago as of Dec. 12, according to data from Baker Hughes $(BKR)$.

"The market will eventually come into balance and go into undersupply on its own over the next year or so," Young added.

On Tuesday, U.S. and global benchmark crude prices settled at their lowest levels since February 2021, according to Dow Jones Market Data. West Texas Intermediate crude (CL.1) saw its January contract (CLF26) finish at $55.27 a barrel on the New York Mercantile Exchange, while Brent crude (BRN00) for February delivery (BZCG26) ended at $58.92.

Oil's weakness this year is "primarily a surplus plus sentiment story, with OPEC+ policy acting as an accelerant, rather than the sole driver," said Rebecca Babin, senior energy trader and managing director at CIBC Private Wealth. OPEC+, a group of major oil producers comprising the Organization of the Petroleum Exporting Countries and its allies, unwound previous production cuts faster than expected this year.

Coming into this year, the market was already expected to be oversupplied, with demand growth expected at roughly 1 million barrels per day and supply growth forecast at closer to 1.6 million to 1.8 million barrels per day - even before OPEC+ began unwinding production cuts, Babin noted. "The imbalance meant the market was heading into surplus regardless, and prices were already vulnerable," she said.

An unusual year

A number of factors made this year a particularly unusual one for oil.

"The most unique feature of this market has been the unusual combination of highly resilient supply, soft demand and a sharp reduction in perceived geopolitical risk," said Henry Hoffman, co-portfolio manager of the Catalyst Energy Infrastructure Fund.

'The most unique feature of this market has been the unusual combination of highly resilient supply, soft demand and a sharp reduction in perceived geopolitical risk.' Henry Hoffman, Catalyst Energy Infrastructure Fund

Oil prices can still quickly turn, according to Hoffman. A pause in OPEC+ supply increases would likely support prices, as would a renewed geopolitical risk premium if peace hopes fade and sanctions on Russia are more strictly enforced, he said.

But the downside for oil appears "limited," he added, because OPEC+ retains significant spare production capacity that it can use to support the market "if prices fall too far."

Actions by the group of major oil producers this year, however, have been a key market-moving piece for the oil market.

The "kicker" this year was OPEC+'s decision to begin lifting production quotas sooner and faster than expected, said Babin. That "added incremental supply into a market that was already loosening and accelerated the downside in prices."

At the same time, non-OPEC supply, particularly from the U.S., "continued to outperform, driven by efficiency gains and consolidation among shale producers - which widened the surplus further and reinforced bearish sentiment across paper markets," she said.

WTI oil was down nearly 23% year to date as of Monday, while Brent has lost 21% - with both poised for their biggest yearly drops since the 2020 pandemic year.

Babin said OPEC+ likely wanted to prevent further loss of market share and reduce the "spare-capacity overhang that had become a persistent weight on the market."

Surplus crude-oil production capacity among members of OPEC was estimated at 4.6 million barrels per day in 2024, more than double the 2.3 million barrels per day in 2023, according to the Energy Information Administration.

There was a possibility that the spare capacity could come into the market at any time, said Young of Bison Interests, who referred to that spare capacity as essentially a "shadow inventory."

By unwinding production cuts, OPEC+ could get a better idea of its true spare-capacity levels - and it will likely want to cut output again, Young said, "with better-calibrated quotas, to try to balance the market while perhaps more convincingly arguing there's less spare capacity based on the upcoming audit and recent production-quota misses."

Prices retreat for now

On Tuesday, the decline in oil prices accelerated. Expectations that a global supply surplus will persist helped weigh on prices, fueled in part by hopes for a resolution to the Russia-Ukraine conflict.

Tepid U.S. jobs data, meanwhile, raised concerns about a slowdown in growth for oil demand.

Oil prices have actually held up most of this year due to geopolitical risk premiums, as well as China purchasing oil for its crude reserves, said Simon Wong, portfolio manager at Gabelli Funds.

If it weren't for the geopolitical risk premiums, oil prices would likely be even lower, Wong said, and "we are starting to see that now."

But Rob Thummel, senior portfolio manager at Tortoise Capital, believes that overall, the premium embedded in oil prices related to geopolitical risk has "essentially evaporated" this year as the global market has become oversupplied.

The International Energy Agency forecast a global oil supply surplus of about 2.3 million barrels per day for this year, and it expects that to rise to a surplus of 3.8 million barrels per day in 2026.

Still, low oil prices could boost global demand over the next few years, and over the long term, the IEA and others expect global oil demand to continue to rise, Thummel noted.

That said, next year for oil traders could, in some ways, be similar to 2025.

Oil trading in early 2026 is expected to be dominated by rising inventories, which should keep pressure on prices in the near term, CIBC's Babin said. The focus will then shift to whether the market can stabilize in the second half of the year, as "inventories are worked through and supply responses begin to emerge" on the back of the lower oil prices.

So "2026 looks like a continuation of the current dynamic: a challenging [oil supply-demand] balance, persistent volatility and a market that remains structurally vulnerable to sharp rallies - but only if something meaningfully shifts supply, demand or policy," said Babin.

-Myra P. Saefong

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December 17, 2025 07:00 ET (12:00 GMT)

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