Clashing narratives from Opec and the International Energy Agency (IEA) on the oil market are turning next year into a high-stakes guessing game. On one hand, producers are firmly in control, demand is robust, supply cuts are working, and the market can absorb a cautious return of barrels. On the other hand, demand is faltering, and an oil flood is looming.

BACKGROUND- Opec+ rapidly unwound voluntary production cuts this year in a bid to regain market share from US shale producers. The policy reversal saw production ceilings increase by some 2.9 mn bbl / d since April.

Every barrel Opec+ brought back was one barrel too many, the IEA argues. The agency has been sounding the glut alarm for months, saying that supply is set to exceed demand by some 4 mn bbl / d next year. The key culprit is a surge in non-Opec production — like US shale fields, Canadian oil sands, and Brazilian and Guyanese offshore rigs.

The cartel and the agency can’t agree on demand. The gap between their oil consumption forecasts has widened to some 540k bbl / d as Opec sees global oil demand growing by 1.4 mn bbl / d in 2026, almost double the IEA’s forecast of just 860k bbl / d.

Where the divergence lies: Opec argues consumption in Asia (especially China) is resilient enough to offset slowdowns elsewhere. Meanwhile, the IEA thinks demand in key emerging markets has consistently underperformed as trends like EV adoption are nibbling away at oil’s growth.

Both agree on one thing, though — a quiet winter. Global oil demand always cools in 1Q, and the wider Opec+ group hit the pause button for 1Q 2026, agreeing not to add any more barrels — an implicit nod to the seasonal slowdown and some looming economic uncertainty.

The IEA, however, views that pause as a mere speed bump. Even with Opec+ holding back in 1Q, the agency expects the barrels to come flooding in later. The combined surge of non-Opec output plus Opec+’s phased return of its earlier cuts will push the market into a surplus for the year as a whole, the IEA argues.

Early warnings started to show up: Global observed oil inventories swelled by some 225 mn barrels between January and August, reaching a four-year high — signaling that supply was outpacing demand during the period.

Why this matters for traders

Many are hedging their bets on both scenarios. We saw it in the pricing: for most of this year, outright oil prices held relatively firm and even traded in backwardation (near-term prices higher than futures), signaling a tighter market than the IEA’s forecast. The sentiment shifted by 4Q, as futures for next year traded above prompt prices — a sign traders were pricing in downside balance risks the IEA had been flagging.

SOUND SMART- Oil futures don’t follow textbook supply-and-demand economics. Higher future prices don’t signal stronger future consumption; they reflect comfortable supply conditions. When oil is plentiful, spot prices soften while futures rise to reflect storage and financing costs, pushing the curve into contango. Backwardation is the opposite: buyers pay up for oil now when supply is tight, or demand is strong, lifting near-term prices above later delivery. That’s why the shift into contango late in the year wasn’t a vote of confidence in demand — it was the market pricing of looser balances ahead.

The stakes are high for the Kingdom

The Kingdom’s oil strategy is a high-wire act: Oil still constitutes 60% of state revenue and over 65% of exports. Drops in average oil prices can significantly increase budget deficits, which have run for the past eight quarters. The trend already spurred increased government borrowing to cover the gap, and talk of trimming big-ticket projects is growing.

BUT- Riyadh appears willing to tolerate short-term price weakness to send a message — punishing Opec+ quota violators and pushing back against US shale producers who might otherwise take market share. It’s a dangerous game, but one Saudi has played before (recall 2014-2016’s price wars).

ICYMI- We sat down with EFG Hermes’ Head of Research Ahmed Shams El Din earlier this year to give us his take on what low oil prices could mean.

What signals to look for next?

We’ll be watching out for oil futures curve. If contango persists or deepens going into 2026, it means the IEA’s view is winning the day, and Opec+ may need to react more decisively. Meanwhile, a return to backwardation would indicate that barrels are tightening up. Keep an eye on time spreads as they are the heartbeat of how traders perceive the situation.

The second signal is inventory levels. It’s one thing for analysts to predict a glut — it’s another to see crude stockpiles actually pile up to the rafters. If we continue to see outsized builds in US and OECD stock reports, or floating storage ticking up, the IEA’s surplus story will gain ground. Meanwhile, if inventories start drawing down unexpectedly (say, a cold winter sparks demand or Opec+’s pause wasn’t enough and they cut more), it will be a sign the market is tighter than the doomsayers had thought.

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