(Yahoo! Finance) - Crude oil prices fell to levels not seen since the start of 2021 as a widely expected supply glut picked up momentum and peace talks in the Russia-Ukraine conflict took steps forward.
Futures on international pricing benchmark Brent crude (BZ=F) fell by more than 2% to trade below $59 on Tuesday, while futures on US benchmark West Texas Intermediate (WTI) crude (CL=F) fell over 3% to at one point trade below $55.
Both energy products reached levels Tuesday that had not been seen since February 2021 as analysts pointed to an outlook marked by "extraordinary oversupply."
'Cartoonishly oversupplied'
Both Brent and WTI crude are headed for yearly losses of more than 20% as the market has been flooded with supply.
The Organization of the Petroleum Exporting Countries and its allies (OPEC+) have been unwinding cuts at a significant rate, increasing the amount of barrels added to the market each month, while other supplier countries outside of the Americas have been raising their levels.
Between April and December, OPEC+ member countries increased production by 2.9 million barrels per day as Saudi Arabia sought to retake market share and price control from the West. In the US, the federal Energy Information Administration expects domestic oil inventories to continue building through 2026 as well.
Even with a recent decision by OPEC to hold production rates steady through the first quarter, the International Energy Agency said last week that it now expects 2026's oil glut to reach 3.8 million barrels per day.
On the water, crude tankers at sea are now holding more than 1 billion barrels — a figure that has steadily risen over the past few months as sellers have had a harder time finding buyers willing to take the oil.
Prices for Dubai crude oil, a key pricing benchmark in the Asian market, and barrels on the US Gulf Coast both slipped into contango on Tuesday morning, according to Bloomberg data.
Contango is a market pattern where futures prices further out on the curve are higher than near-dated futures or spot prices as costs for storage, financing, and carry become steeper and traders look for a looser market to come.
The price action pressure is also showing up in refined products. Crack spreads, or the difference between oil and its derived products, like jet fuel, gasoline, and diesel, have tightened over the past month while prices on the crude derivatives, which had been supporting overall pricing strength in the oil market, have fallen.
The Street is bearish on the market. Commodities strategists at JPMorgan Chase and Goldman Sachs expect Brent prices to slip into the $50s per barrel in 2026, reaching levels not seen since the start of the pandemic, when an overnight halt in cars on the road briefly pushed prices negative.
"At the risk of flogging a very dead horse, our message to the market has remained consistent since June 2023," JPMorgan strategists wrote in a note to clients. "While demand is robust, supply is simply too abundant."
If the OPEC+ cartel, which has agreed to pause unwinding through the first quarter, doesn't shift to cutting barrels and other producers don't slow down as well, the strategists see oil possibly dropping into the $40s or even $30s per barrel — levels that would be catastrophic for the industry.
Given all of this, Macquarie oil analysts wrote in a recent note to clients that the market's downward momentum is outstripping even their bearish outlooks.
"Our near-term balances now appear even more bearish than what we had previously characterized as 'cartoonishly' oversupplied," the analysts wrote.
'Fundamentals remain the anchor'
However, there are a few bullish signs in the oil market that could help maintain price support.
Recent sanctions by the US Treasury Department against Rosneft and Lukoil, two of Russia's largest oil producers, could theoretically provide pricing support by taking barrels out of the market. But it is unclear how much Russian oil will find evasive routes to refiners in countries such as China and India, which see an opportunity to buy at the low prices offered for sanctioned oil.
If a peace agreement were to be reached between Ukraine and Russia and the Treasury Department's sanctions were to be lifted, Russian energy exports would likely jump and add to the already overflowing market. In recent days, talks between Kyiv and Washington appeared to have moved forward as Ukraine and its allies struck an agreement over security guarantees.
In Central America, if tensions between Washington and Caracas remain high, flows from Venezuela would likely drop off as buyers shy away from the scrutiny that comes with Venezuelan oil. The US's seizure of a crude tanker off the Venezuelan coast last week marked the most significant escalation yet.
And in the US, Federal Reserve rate cuts, such as the quarter-point cut announced last week, are typically bullish for oil markets, as they weaken the dollar and signal stronger growth expectations.
Yet it's not likely to be enough, said Claudio Galimberti, chief economist and global director of market analysis at Rystad Energy.
"For energy commodities specifically, fundamentals remain the anchor," Galimberti said.
In the latest Dallas Fed quarterly survey, interviewees at exploration and production firms pointed to significant financial risks to come if prices keep dropping.
"The administration is pushing for $40 per barrel crude oil, and with tariffs on foreign tubular goods, [input] prices are up, and drilling is going to disappear," one survey respondent said. "The oil industry is once again going to lose valuable employees."
In the oilfield services sector, which comprises companies like Halliburton (HAL) that provide operational support to exploration companies, the messaging was the same.
"A vibrant oilfield services sector is critical if and when the US needs to ramp up production," a respondent said. "Right now we are bleeding."
By Jake Conley - Breaking Business News Reporter
