Between surplus and lack of investment, where are oil prices heading?

While the International Energy Agency this week said that it expects a "large surplus" of oil in the coming months, the head of Saudi Aramco pointed to the lack of investment by oil companies, which could ultimately result in a shortage of supply.

In recent weeks, there has been little good news for oil companies, with job cuts on the rise amid low prices. These relatively depressed prices are the result of the OPEC+'s strategy to regain market share.

Abundant supply

In March, the cartel began to put back on the market the 2.2 million barrels per day of production cuts decided at the end of 2022. An increase in production initially planned over an 18-month period... and which was ultimately completed in six months.

While this abundance of supply has a negative impact on prices, there has been no collapse in them either: the price of Brent crude has remained around $60-70 per barrel over the past three months.

This is probably due to resilient demand. There was a lot of concern in the spring—tariffs led to fears of a recession—but these concerns have gradually dissipated, which helped stabilize prices.

Nevertheless, the market is expected to remain in surplus over the next few months. This week, the International Energy Agency even spoke of a "large surplus," estimated at 3.2 million barrels per day between now and June 2026.

It therefore seems unlikely that prices will rise in the coming months. However, we can never rule out the possibility of "geopolitical uncertainties."

However, if we look at the longer term, it is entirely possible that oil prices will increase significantly once again.

Towards a shortage?

Commodities are cyclical assets that evolve with the economic climate and also depend on investment cycles. When prices are high, companies invest to increase their production. Until supply becomes too abundant, causing prices to fall. And when prices are low, everyone cuts back on investment, which reduces supply and ultimately leads to higher prices.

Some already fear that this dynamic is already underway. This is the case for Saudi Aramco CEO Amin Nasser, who believes that investment is currently "extremely low."

This decline in investment (in exploration and production) is not a recent phenomenon, but rather a trend that has been ongoing since the crash of 2014. "We've had a decade where people haven't been exploring. That will have an impact," Amin Nasser told the Financial Times.

During this period, most of the growth in production came from US shale. In the United States, production rose from just over 5 mbd (million barrels per day) in 2010 to 13.5 mbd in 2024. Production is expected to plateau or even decline given current price levels. Indeed, the Dallas Fed estimates that the price per barrel needed to launch new drilling is $65.

The last decade was also a period during which there was a belief that the energy transition would inevitably lead to a decline in demand. But this transition is actually quite slow, and oil demand will remain high in the years to come.