Global oil supplies are suddenly flowing. Why a crude glut won't mean cheaper diesel.

By Myra P. Saefong

The market may 'look oversupplied on paper, but it is still operating under anything but normal conditions,' says an energy trader

Global oil supplies are expected to outpace demand in the fourth quarter of this year, according to the International Energy Agency.

It's official: The world is expected to soon have more oil than it needs for the first time since the Iran war began in February. But more oil won't automatically lead to lower diesel prices.

If you look at the supply-and-demand balances on paper, "there is certainly reason to feel better," said Rebecca Babin, a senior energy trader and managing director at CIBC Private Wealth. Beneath the surface, however, "this is still a market that is operating with significant inefficiencies, elevated risks and very little room for error."

The International Energy Agency, one of the world's premier authorities on global oil data, reported Friday that global oil supplies are expected to outpace demand in the fourth quarter, forecasting demand at 103.3 million barrels per day, versus 105 million barrels of supply. That suggests the world will see a surplus of around 1.7 million barrels for the quarter. That compares with an estimated 600,000-barrel supply deficit in the third quarter, according to IEA data.

Crucially, much of the projected surplus rests on the assumption of normalizing oil flows from the Organization of the Petroleum Exporting Countries, said Babin. That's "far from certain in an on-again, off-again war-and-peace environment."

President Donald Trump has said the U.S. doesn't need a deal with Iran and has signaled that he doesn't want the U.S. military to return to major combat in the region, according to the Wall Street Journal.

The oil market appears to be breathing a sigh of relief. U.S. benchmark West Texas Intermediate crude (CL.1) (CLZ26) has lost nearly 15% during two consecutive weeks of declines. Global benchmark Brent crude (BRN00) (BRNF27) is down almost 19% from two weeks ago.

The price declines follow strong gains in global oil supplies, with the IEA estimating a climb of 2.3 million barrels per day to reach 105.4 million barrels per day in October following a recovery in exports from the Persian Gulf.

But "simply counting barrels no longer tells the full story," Babin told MarketWatch, and "consistent flows don't necessarily mean free flows."

Getting oil through the Strait of Hormuz now involves 'more vessels, ship-to-ship transfers, higher transportation costs and persistent security threats.'Rebecca Babin, CIBC Private Wealth

Getting oil through the Strait of Hormuz now involves "more vessels, ship-to-ship transfers, higher transportation costs and persistent security threats," she said. "The barrels may be moving, but the cost, complexity and risk of moving them have fundamentally changed."

Then there's the issue of refilling global oil reserves, which have fallen to their lowest in years, to help offset the war's supply disruptions. The U.S. Strategic Petroleum Reserve stands at its lowest since the 1980s.

Significant restocking needs to follow massive inventory draws from storage, which could "absorb" some of the anticipated supply surplus, said Babin.

And even if crude becomes better supplied, that doesn't necessarily solve the challenges in refined products, she said. Refining capacity remains "constrained, disruptions tied to Russia and Ukraine remain unresolved and diesel markets in particular remain vulnerable."

The bottom line is that while projected oil-supply surpluses are helping keep crude from sustaining prices above $100, "a better-supplied crude market doesn't automatically translate into cheaper fuel for consumers," Babin said.

So "the market may look oversupplied on paper, but it is still operating under anything but normal conditions," she said. "It's far too early to signal the all-clear."

-Myra P. Saefong

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

11-13-26 1704ET