Oil prices ended 2025 with their steepest annual decline in five years, pressured by a persistent global supply surplus and growing output from major producers, despite geopolitical tensions in key oil-exporting regions.
Benchmark US crude, West Texas Intermediate (WTI), settled down 0.9 percent at US$57.42 a barrel on Tuesday, marking a fall of about 20 percent for the year the sharpest annual loss since 2020, when demand collapsed during the Covid-19 pandemic.
Traders are closely watching an upcoming meeting of the OPEC+ producer group, as well as policy signals from US President Donald Trump regarding major oil producers including Russia, Iran and Venezuela.
But analysts say the dominant trend shaping the market remains oversupply.
Both the International Energy Agency (IEA) and the US government estimate that global oil production exceeded consumption by just over two million barrels per day in 2025, a gap expected to widen further in 2026.
OPEC+ unsettled markets earlier this year when it raised output, stepping away from its long-standing strategy of defending prices. The move was widely seen as an attempt to reclaim market share as non-OPEC producers continued to expand supply.
Countries such as Brazil and Guyana have sharply increased output, while US crude production has reached record levels. OPEC+ is now expected to pause further output increases during talks scheduled this weekend.
The drop in oil prices has helped ease inflationary pressures in major economies, offering relief to central banks struggling to contain price growth.
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In the United States, the Federal Reserve cut interest rates three times in 2025, and minutes from its most recent meeting indicated that most policymakers saw scope for additional reductions.
However, weaker crude prices are also reshaping the fiscal outlook for oil-exporting countries and energy companies, many of which rely heavily on oil revenues to fund budgets and investment.
“The oil market is set to remain oversupplied into 2026, with strong non-OPEC production from the United States, Brazil, Guyana and Argentina outpacing uneven global demand,” said Kaynat Chainwala, an analyst at Kotak Securities.
She said prices were likely to remain range-bound between US$50 and US$70 a barrel, although supply risks linked to Venezuela or Russia could provide some support.
In the United States, a weekly government report released on Thursday showed that overall petroleum inventories rose to their highest level since October, as a sharp increase in refined product stocks outweighed a drawdown in crude oil inventories.
Despite this year’s sharp decline, several factors have prevented prices from falling further.
For much of the summer, crude futures held above $65 a barrel even as global supply continued to rise. Analysts say a significant portion of the surplus was absorbed into storage facilities in China, far from the main pricing hubs used for oil futures contracts.
By contrast, storage levels in the West remained relatively low. Tank farms in Cushing, Oklahoma the delivery point for WTI futures are heading toward their lowest annual average inventory level since 2008.
At the same time, output of so-called “gassy” petroleum products such as propane has surged as US shale producers increasingly pump lighter hydrocarbons. These products have limited influence on benchmark crude prices.
Geopolitical developments are also expected to shape oil markets in the year ahead.
The United States is pushing diplomatic efforts to end the war in Ukraine, a move that could reduce the amount of Russian oil currently held in floating storage. Washington has also seized tankers carrying Venezuelan crude, forcing the South American country to curb production in recent days.
Trump said this week the United States would strike Iran again if it rebuilds its nuclear programme. Brent crude briefly surged above $80 a barrel earlier this year after US strikes on Iran, but prices quickly retreated as tensions eased.
