Oil markets entered 2026 on an uncertain footing, with prices oscillating between modest gains and losses as traders weighed a growing supply surplus against intensifying geopolitical flashpoints. After enduring their worst annual performance since the pandemic era, crude benchmarks are struggling to establish direction, highlighting a market caught between structural oversupply and episodic political shocks.

Brent crude hovered near $61 a barrel in early trading, while West Texas Intermediate traded just above $57. The muted price action followed an 18% slump in 2025, underscoring how persistent supply growth and softening demand have overwhelmed even severe geopolitical disruptions. Trading activity in Middle Eastern benchmarks, including Dubai-linked derivatives, showed notable selling pressure during Asian hours, reflecting cautious positioning at the start of the year.

Supply Overhang Dominates the Fundamental Picture

The dominant force shaping oil prices remains the expanding global surplus. Output increases from both OPEC+ producers and non-OPEC suppliers, including the United States and Guyana, have continued to outpace demand growth. According to the International Energy Agency, the market could face an excess of roughly 3.8 million barrels per day this year, a projection that has tempered bullish sentiment.

Within OPEC, caution has become the prevailing strategy. Leading members such as Saudi Arabia are expected to reaffirm a pause in planned supply increases when the group meets online on January 4. Seasonal weakness in consumption during the first quarter further reinforces the cartel’s reluctance to add barrels into an already saturated market.

Geopolitical Risks Offer Only Limited Support

Despite the heavy surplus, geopolitical developments continue to inject volatility into oil markets. Tensions in Iran have escalated after the local currency collapsed to a record low, sparking protests across Tehran and other cities. U.S. President Donald Trump said Washington would “rescue” protesters if they are attacked, a statement that raised concerns about potential escalation in an already fragile region.

At the same time, the U.S. administration has intensified pressure on Venezuela’s oil sector, sanctioning companies and vessels accused of evading restrictions. A partial blockade on oil shipments and recent military actions inside the country have heightened uncertainty around Venezuelan exports, though the market reaction has remained muted.

In Eastern Europe, attacks between Russia and Ukraine on Black Sea port infrastructure over the New Year period added another layer of risk. Damage to energy facilities has disrupted some flows from Kazakhstan, itself part of the OPEC+ alliance. However, traders appear increasingly desensitized to such events after a year in which geopolitical shocks repeatedly failed to translate into sustained price rallies.

Why the Market Remains Skeptical

Analysts argue that the oil market’s restrained response reflects fatigue with geopolitical headlines and confidence that spare capacity and alternative supply routes can absorb disruptions. As Robert Rennie of Westpac Banking Corp. noted, political risks may support prices in the short term, but oversupply and the possibility of progress toward a Ukraine peace framework are likely to keep pressure on crude through the first quarter.

For investors and policymakers alike, the early signals of 2026 suggest a market still searching for equilibrium. Unless demand surprises to the upside or supply discipline tightens meaningfully, oil prices may struggle to escape the shadow of last year’s downturn.