VINACHEM

With much of the global equity space regularly hitting record highs in 2025, allocators might find an upside surprise in one of the worst-performing sectors this year: the oil patch.

The energy space has been unloved this year, with WTI crude net long positions falling close to record lows, according to the Commodity Futures Trading Commission. And that’s with the price of WTI and Brent crude benchmarks already down over 8% and 9%, respectively, this year, as of September 26.

But energy was the best-performing sector last week, so even though oil prices slipped early on Monday, the bear case may be weakening.

The negative outlook for oil is built on the expectation of significant inventory surpluses later this year and into 2026, driven by weak demand and increased production from OPEC +, the Organization of the Petroleum Exporting Countries and other producers including Russia.

The 2026 demand forecast from the International Energy Agency calls for only 700,000 barrels per day, the lowest since 2009, excluding the pandemic. And even though the U.S. Department of Energy forecasts lower year-on-year U.S. oil production in 2026, it also expects Brent crude prices to average $51 per barrel in 2026 versus around $70, as of September 26 and says oil inventory increases globally could average more than 1.7 million barrels per day in the next calendar year.

However, this bear case appears overstated.

First, OPEC+ may fail to meet its new production quotas, based on analysts cited in Reuters reporting. While the producer group previously announced plans to fully unwind 2.2 million bpd of cuts by the end of September and then begin another 1.65 million bpd of rollbacks the following month, they are falling behind.

“OPEC+ has delivered about three quarters of the extra oil output it targeted since the group started production hikes in April, and the level may fall closer to half later in the year as producers hit capacity limits,” Reuters said.

However, this bear case appears overstated.

First, OPEC+ may fail to meet its new production quotas, based on analysts cited in Reuters reporting. While the producer group previously announced plans to fully unwind 2.2 million bpd of cuts by the end of September and then begin another 1.65 million bpd of rollbacks the following month, they are falling behind.

“OPEC+ has delivered about three quarters of the extra oil output it targeted since the group started production hikes in April, and the level may fall closer to half later in the year as producers hit capacity limits,” Reuters said.

UNDERAPPRECIATED OBSTACLES

Two other potentially underappreciated factors could also throw this bearish forecast off course.

First, there is Ukraine’s drone campaign to impair Russia’s oil export business. Ukrainian drones have hit around a dozen Russian oil refineries in the last 45 days, taking roughly 25% of Russia’s refinery capacity offline.

Can Ukraine sustain its success to date? Or might its campaign be extended? If so, what would that mean for the price of oil? It is notable that Russia retaliated, calling for a partial diesel export ban, and Brent crude prices responded with a more than 1% jump on Friday.

Next, China is continuing to stockpile oil, which could support prices. While official data about Chinese stockpiles is not available, Reuters reporting notes that “from March onwards China has been importing crude at a far higher rate than it needs to meet its domestic fuel requirements”. The average volume of surplus crude in China was 990,000 bpd in the first eight months of the year.

And that stockpiling could continue. Market estimates find a significant amount of storage, potentially around half of available tanks and caverns, may still be available.

If these factors cause expectations for the near-term oil supply-demand balance to flip in the coming months, oil-related equities could get a boost from short covering, position squaring and real demand.

COMMODITY CYCLES

Historically, classic commodity bull cycles have often begun with precious metals, extended to industrial metals and then incorporated the energy complex.

Stages one and two of this have already manifested this year, with precious metals kicking it off. The VanEck Gold Miners ETF, or GDX, has jumped almost 100% in the year to date. Some industrial metals have followed, with the Global X Copper Miners ETF, known as COPX, up nearly 30% in the last three months. The energy complex’s turn could be next.

One trend that may be icing on the cake here is further dollar weakness, as crude is priced in the U.S. currency.

The dollar has weakened by almost 10% this year, but this has mostly reflected foreign investors hedging their dollar exposure rather than reducing it, meaning there is room for position reductions. And that could ultimately boost crude prices.

Of course, there could be offsetting forces. For one, U.S. President Donald Trump’s trade war could escalate and weigh on global economic activity and, thus, demand for crude.

However, there is also reason to believe that the world’s two largest economies – the U.S. and China – will run hot in the year ahead, with Trump calling for a drop in interest rates and China increasing its efforts to defeat deflation, opens new tab. And then there’s the global AI build-out that promises to see tech giants spend billions on capex.

Could unexpected events challenge this outlook? Sure. But with positioning in the oil space so bearish, any bad news may already be in the price.