Oil headed for its steepest annual loss since the pandemic in 2020, with prices undermined by concerns about a punishing surplus that’s set to dominate market sentiment and trading into the new year.

Brent for March traded near $61 a barrel, with most-active prices on track for a fifth monthly loss and down by about a fifth this year. West Texas Intermediate was below $58 a barrel. Traders’ near-term focus was on an upcoming OPEC+ meeting, a bearish US industry report, and a slew of geopolitical tensions.

 Crude has slumped this year as supplies swelled from OPEC+ and its rivals, while demand growth slowed. Top forecasters including the International Energy Agency expect a huge glut next year, and even OPEC’s secretariat — usually more bullish than others — projects a modest surplus. Over time, lower prices may prompt drillers to rein in investments, paving the way for a rebound.

“The real story for us — beyond the early-2026 glut narrative — is that deferring investment now increases the odds of a sharper, disorderly oil spike later,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore.

“The oil market is starting 2026 with a split personality: short-term comfort versus long-term unease,” she added, referring to a near-term build in inventories but a potential supply gap further out.

OPEC+ members — scheduled to meet by video conference on Jan. 4. — are expected to stick with a plan to pause further supply hikes amid growing evidence of the surplus, according to three delegates.

Ahead of that, the industry-backed American Petroleum Institute reported crude inventories increased 1.7 million barrels last week. That would be the biggest build since mid-November, if confirmed by official data later Wednesday. The API also saw bigger holdings of gasoline and distillates.

Among geopolitical tensions, the United Arab Emirates said that it would withdraw forces from Yemen following a flare-up in tensions with Gulf ally Saudi Arabia over military operations in the conflict-hit country. Saudi Arabia and the UAE are both important members of OPEC.

Elsewhere, traders are tracking a partial US blockade of crude shipments from Venezuela. President Donald Trump has revealed a covert US strike against what he said was a drug-trafficking facility, raising fresh questions about how far Washington is willing to go to pressure the regime of Nicolas Maduro.

US-led efforts to end the war in Ukraine have also been in focus. Kremlin spokesman Dmitry Peskov on Tuesday confirmed Russia would “toughen” its negotiating stance following an alleged attack against a presidential residence. Ukrainian President Volodymyr Zelenskiy dismissed the charge.

The drop in crude has helped to reduce inflationary pressures, a boon for central bankers as they seek to contain price gains. The US Federal Reserve cut rates three times in 2025, and minutes from policymakers’ last meeting showed most officials saw more reductions as appropriate.

At the same time, the drop has challenged producers, including OPEC+ nations that rely on income from crude to help them fund expenditure. Earlier this year, Saudi Arabia projected a budget shortfall for this year estimated at 5.3% of gross domestic product, more than double an earlier outlook.

Activity was muted on Wednesday, with many traders away. Most financial markets, including crude, will be closed on Thursday for the New Year break.

Source: The Hindu Business Line 

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