Oil Markets Struggle With Oversupply as Demand Growth Falters

Global oil markets are heading into the final months of 2025 under the shadow of oversupply. The International Energy Agency’s September Oil Report projects demand will increase by 740Mb/d year-on-year, only marginally higher than last month’s forecast. That growth, however, is far from even. Demand from OECD economies has surpassed IEA expectations this year, while consumption in emerging economies has remained muted. IEA expects overall oil use in advanced economies to slip back into contraction by the second half of the year, leaving global demand effectively flat.

The supply side tells a different story. World oil production inched up to a record 106.9MMb/d in August, driven by OPEC+ producers gradually unwinding their output cuts and non-OPEC+ supply holding near all-time highs. According to the IEA, global oil production is on track to rise by 2.7MMb/d this year to 105.8MMb/d, followed by another 2.1MMb/d increase in 2026. Non-OPEC+ countries, led by the United States, Brazil, Canada, Guyana and Argentina, will contribute roughly half of that growth.

Refiners, meanwhile, are pushing capacity hard. Crude throughputs surged by 400Mb/d to 85.1MMb/d in August, a record, but seasonal maintenance is set to drive output down by 3.5MMb/d through October. Refinery margins remain positive despite cracks in diesel markets, with stronger gasoline economics partly cushioning the fall. Looking further ahead, the IEA expects global refining runs to average 83.5MMb/d in 2025 and 84MMb/d in 2026, reflecting slower growth.

The market’s imbalance is becoming increasingly visible in inventories. Global oil stocks rose for the sixth straight month in July, climbing by 26.5MMb. Since January, inventories have expanded by 187MMb, although they remain 67MMb below the five-year average. A large share of that build has been concentrated in China. Preliminary August data suggest global inventories were largely unchanged, with OECD builds offset by declines in oil on water. The IEA nonetheless projects that stocks could rise by 2.5MMb/d on average in the second half of the year, an unsustainable pace if demand does not accelerate.

Prices have reflected these bearish fundamentals. Benchmark Brent crude futures drifted down by about US$2/b in August to US$67/b, and at the time of writing remain around that level. Even intensifying geopolitical concerns, including the absence of progress on a Russia-Ukraine peace deal and new sanctions on Moscow and Tehran, have failed to lift sentiment. According to the IEA, the possibility of bloated balances has kept investors cautious.

OPEC+’s strategy adds another layer of uncertainty. On Sept. 7, the alliance confirmed it would begin unwinding the second tranche of supply cuts, raising its collective target by 137Mb/d in October. At that pace, it would take a year to fully reverse the 1.65MMb/d in cuts agreed in April 2023. In practice, the IEA notes, the group is falling short of its stated targets. Since the first quarter, OPEC+ output has climbed by only 1.5MMb/d, compared to a pledged 2.5MMb/d. Iraq, the UAE, Kuwait, and Kazakhstan are already pumping above quota, while Russia and others face capacity constraints. Much of the incremental output from Saudi Arabia and its Gulf neighbors has been absorbed domestically by refineries and power generation rather than flowing to global export markets.

The non-OPEC+ bloc has shown steadier progress. Production remains near record highs in the United States, Brazil, Guyana, Canada, and Argentina. Non-OPEC+ producers are expected to add 1.4MMb/d of supply in 2025 and just over 1MMb/d in 2026, putting their growth on par with that of OPEC+.

Geopolitical risks still loom. The EU’s ban on refined products derived from Russian crude, set to take effect in early 2026, could disrupt trade flows and pressure refining margins in Europe. Toughened sanctions on both Russia and Iran are already nudging exports lower, though the IEA says their impact remains modest so far. Any sharper curbs could rebalance the market, at least temporarily, particularly if Asian buyers scale back purchases.

In Mexico, the IEA estimates that oil output remains flat, with production at 1.47MMb/d in August, just below July levels. Sustainable capacity is estimated at 1.5MMb/d, leaving the country with a narrow effective spare cushion of 30Mb. 

The overarching story, however, is one of supply outpacing demand. Even as inventories swell and prices stagnate near US$67/b, producers across OPEC+ and beyond continue to pump at or near record levels. The IEA’s forecast of steady but modest demand growth, roughly 700Mb/d in both 2025 and 2026, suggests markets could remain oversupplied well into next year unless geopolitical shocks or unexpected outages intervene.