At the start of 2026, oil analysts were nearly unanimous: the market was heading into a deep oversupply cycle that would pressure prices lower throughout the year. The International Energy Agency estimated a surplus of roughly 3.7 million barrels per day, and after a 20% drop in 2025, Brent crude appeared structurally vulnerable. Instead, oil has rallied about 15% year to date, confounding forecasts and forcing investors to reconsider how supply fundamentals interact with geopolitical and macro risk premiums.

The divergence highlights a critical reality in commodity markets: oversupply alone does not automatically dictate price direction.

Geopolitical Risk Is Repricing the Barrel

While headline balances suggest a glut of 2–3 million barrels per day, traders have increasingly priced in disruptions that offset part of the surplus. U.S. sanctions on major Russian producers Rosneft and Lukoil have reportedly removed roughly 600,000 bpd from global flows. Drone strikes affecting the Caspian Pipeline Consortium have cut exports by another 440,000 bpd, pushing volumes to multi-year lows.

More significantly, escalating tensions with Iran have introduced risk around the Strait of Hormuz, through which approximately 20 million bpd of petroleum products transit. Even without an actual blockade, the mere probability of disruption can sustain a geopolitical premium. Meanwhile, attacks in the Red Sea have rerouted shipping around Africa, tightening physical markets and lifting freight costs.

In effect, while aggregate supply exceeds demand, portions of that supply are perceived as fragile. That perception alone can anchor prices well above what pure fundamentals might justify.

Demand Has Been More Resilient Than Expected

Analysts initially anticipated that slowing manufacturing in Europe and China, combined with electrification trends, would weaken demand. Instead, transportation consumption has remained robust, cold weather episodes have boosted heating needs, and U.S. labor market data has exceeded expectations.

The IEA recently revised its 2026 demand forecast upward by 100,000 to 200,000 bpd, while also noting a 1.2 million bpd month-on-month drop in global supply. China’s expansion of storage capacity further supports spot demand, as Beijing continues opportunistic crude buying.

Additionally, OPEC+ production has trailed its official quotas, tempering the speed at which supply returns to the market. These factors do not eliminate the surplus, but they compress it enough to shift short-term sentiment.

Price Targets vs. Market Psychology

Despite the rally, major banks maintain bearish structural views. Goldman Sachs projects Brent to average $56 per barrel in 2026, implying a decline of more than 20% from current levels. Rystad Energy estimates “fair value” near $61 based on underlying balances.

The disconnect underscores a behavioral dimension. Markets price risk, not just arithmetic supply-demand spreads. In volatile geopolitical environments, traders are reluctant to aggressively short crude even when balance sheets suggest surplus.

For investors in energy equities, commodities, or inflation-sensitive assets, the question is whether the geopolitical premium fades or intensifies. If tensions ease and Russian flows normalize, prices may gravitate toward fundamental fair value. Conversely, prolonged instability could keep oil elevated even amid structural oversupply.

In 2026, oil is proving that a glut does not guarantee weakness. Instead, the interplay between surplus barrels and fragile supply chains is defining a market where risk premiums, not just inventories, set the tone.