Oil's Fragile Rally: Fed Hopes and Supply Fears Offset Glut Concerns

Global oil markets are trading in a state of heightened tension, pulled between opposing forces of macroeconomic hope and geopolitical fear. While prices have registered modest weekly gains, these reflect a delicate equilibrium rather than a strong directional trend. As of early December, Brent crude futures were trading around $63.31 a barrel and U.S. West Texas Intermediate (WTI) near $59.50. The catalysts for this cautious rally are twofold: intensifying geopolitical supply risks and growing market confidence in an imminent shift to easier monetary policy in the United States. However, these upward pressures are being constrained by a stark fundamental reality the persistent risk of a global supply glut driven by strong non-OPEC+ production and concerns about demand growth.

Geopolitical Frayed Wires: Ukraine and Venezuela in Focus

Energy infrastructure has become a direct target in ongoing conflicts, injecting a consistent risk premium into prices. In Ukraine, a sustained drone campaign has shifted into a “more sustained and strategically coordinated phase,” according to analysts at Kpler. This has resulted in attacks on key Russian assets, including the Caspian Pipeline Consortium (CPC) Black Sea terminal and the Druzhba pipeline, a critical conduit for supplying Eastern Europe. While loadings have sometimes resumed via alternate points after attacks, these incidents underscore the vulnerability of transit routes and have contributed to a year-on-year decline in Russian refining throughput.

Simultaneously, a major escalation in U.S.-Venezuela tensions is raising fears of a new supply disruption. A significant U.S. naval deployment off Venezuela's coast has created what analysts term “meaningful optionality” for large-scale military action. Although both sides have signaled openness to dialogue, the mobilization of forces has increased the risk of unintended escalation. The potential impact on supply is significant; analysis suggests even a limited military strike could cut Venezuela's production and exports by 10-15%. Given that China has become the largest buyer of Venezuelan crude, any disruption would force Asian refiners to seek alternative heavy grades, tightening other parts of the market.

OPEC+'s Calculated Restraint Amid a Market Share Battle

Against this volatile backdrop, the OPEC+ alliance is navigating a complex strategic shift. The group, which has significantly increased production by 2.5 million barrels per day since April 2025, recently confirmed it would maintain its output levels into the first quarter of 2026. This pause marks a departure from its previous steady hikes and reflects a growing concern over a looming supply surplus. The International Energy Agency (IEA) has noted that production from non-OPEC+ countries like the United States, Brazil, Canada, Guyana, and Argentina is at or near all-time highs.

This restraint, however, is challenged by internal dynamics. A Reuters survey found that OPEC's actual output in November edged lower despite a planned increase, due to unplanned outages in members like Nigeria and Iraq. Furthermore, Russia a key OPEC+ member finds itself in an uncomfortable position. Dependent on high oil revenues but with limited capacity to increase production due to Western sanctions and Ukrainian attacks on its refineries, Moscow is wary of actions that could cause prices to fall further. The group's stated flexibility to “pause or reverse” its production plans underscores its reactive stance in a market where fundamental oversupply is “loudly knocking on the door,” as noted by PVM analyst Tamas Varga.

The Macroeconomic Wildcard: Fed Policy and Demand Forecasts

The most significant variable for oil's demand-side outlook is the anticipated pivot in U.S. monetary policy. Financial markets are now pricing in an approximately 87% probability of a Federal Reserve interest rate cut at its upcoming December meeting. This expectation is the primary force behind oil's recent gains, with analysts noting that “the potential for a rate cut is overshadowing everything right now and driving crude prices up”.

The mechanism is twofold. First, lower interest rates are expected to stimulate economic growth, thereby supporting future oil consumption. Second, rate cuts typically weaken the U.S. dollar, making dollar-denominated crude oil cheaper for holders of other currencies and bolstering demand. This macroeconomic optimism is colliding with divergent demand forecasts. While OPEC remains bullish, projecting demand growth of 1.3 million barrels per day in 2025 and 1.4 million in 2026, the more conservative IEA expects growth of only around 700,000 barrels per day for both years. The forthcoming U.S. Personal Consumption Expenditures (PCE) index data the Fed's preferred inflation gauge will be critical in validating or undermining the market's aggressive rate-cut bets.

Balancing on a Knife-Edge: Risks to the Outlook

The current market equilibrium is fragile, and the price path for 2026 hinges on which set of forces gains the upper hand. The table below summarizes the key opposing dynamics:

A significant downside risk is that the Fed's policy shift may not deliver the expected economic boost, or may be delayed if inflation proves sticky. On the supply side, the much-discussed glut could materialize if non-OPEC+ production continues to surge while demand growth underwhelms. Credit rating agency Fitch Ratings has already cut its medium-term oil price assumptions to reflect this expected oversupply. Conversely, a major geopolitical escalation that disrupts supply from a key producer, or a stronger-than-anticipated global economic rebound fueled by monetary easing, could quickly shift the balance and propel prices higher. For now, as PVM analysts summarize, the interplay of “war and politics, balanced against comfortable stocks [and] expected supply surplus” is likely to keep prices range-bound.