Oil markets have paused their descent this week but remain under pressure as deepening stock builds clash with disruptive potential from sanctions. The coming days will test whether supply excess or geopolitical risks dominate the narrative.

Supply Surplus Deepens Amid Steady Output

The International Energy Agency (IEA) reports that from January through September 2025 the oil system carried an average surplus of 1.9 million barrels per day (mb/d). This indicates inventory accumulation in storage or afloat, even as key markets show relatively tighter on-shore levels. Concurrently, production growth continues: non-OPEC+ supply is rising in the Americas, and OPEC+ has signalled only modest further increases, but the surplus outlook remains elevated.

For Israeli and global investors watching energy flows, the surplus implies that even a sanction-driven supply cut may take time to materially tighten the market unless production elsewhere responds. For instance, output disruptions in Russia due to sanctions are real but not yet translating into meaningful supply reductions.

Sanctions and Geopolitical Upside But Demand Holds the Key

Sanctions on major Russian oil players, including Lukoil and Rosneft, loom in the background, creating a possible supply risk premium. However, markets remain sceptical until there is clear evidence of real export reductions. Meanwhile, global demand is showing signs of weakness: slower manufacturing activity in key regions and structural headwinds (e.g., vehicle efficiency gains) are weighing on uplift.

For investors in Israel, where energy import dynamics and regional geopolitics both play a role, this means that while the upside from disruption is real the baseline remains one of tepid demand and plentiful supply. In effect, sanctions may moderate the surplus, but they cannot instantly reverse a deep supply overhang.

Market Reaction & Strategic Implications

Oil futures recovered slightly this week but remain on track for a weekly loss as markets digest the dual pressures of surplus and geopolitics. The stronger U.S. dollar and high U.S. production levels further dampen bullish sentiment. The decision by OPEC+ to pause further output increases into early 2026 sends a mixed signal: prudent in acknowledging the surplus, but insufficient in light of building inventory.

Strategically, for energy-sensitive sectors and commodity-linked portfolios, the key takeaway is that the mismatch between supply growth and demand growth remains the dominating theme. In Israel, where energy procurement and geopolitical risk intersect, companies and investors should monitor how sanction enforcement and regional flows evolve, but also keep close watch on demand indicators and inventory trends.

Looking ahead, crude’s trajectory will hinge on whether supply discipline tightens or demand surprises to the upside. The surplus casts a long shadow, but sanctions and regional disruptions offer potential counter-currents. The next few weeks of export data, inventory builds, and OPEC+ communications will be crucial for the market’s next directional move.

What to Monitor Going Forward

Investors should watch: export volumes from Russia and sanctioned producers, inventory data from OECD + key hubs, global demand signals (especially from Asia), and policy signals from OPEC+ around production strategy. The balance between underlying oversupply and episodic disruptions will determine whether oil finds a floor or pushes into further consolidation territory.