Oil Traders Weigh Surplus, Geopolitical Risks to Start 2026

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1:56Find an independent agent at c-i-n-f-i-n dot com. Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to Bloomberg Business Week with Carol Masser and Tim Stenevek on Bloomberg Radio. Oil. When we talk about the commodity, we talked about this earlier with Bill McGlone. Coming off a rough year, it's worst, in fact, since 2020, as concerns about a surplus pressured prices. And we continue to see some of that pressure. You can see that one-year chart, the movement to the downside. Geopolitical risks still out there, seemingly not enough, though, to stem the losses, which is kind of interesting because every time we see either war picking up in the Middle East or elsewhere around the globe, we take a look at oil, and it doesn't always spike or spikes very quickly.

2:47Well, joining us live with what lies ahead for energy, the energy markets and the energy supply, are Bloomberg's senior U.S. oil reporter, Kevin Crowley, and Tim Moore, senior research analysts at Clear Street. He covers the clean energy transition as well as oil and gas. So perfect twosome to talk to. Kevin, kick it off with us. We just talked with our own Josh Saul and Mark Gungloff, talking about the drawdown on energy supplies that we have been seeing and that are expected to continue into 2026 and the impact it may have or is having on the climate. But kick it off, remind us too about the world's energy supplies.

3:22Prices are low and that's because there's a lot of oil out there. That's exactly right. Wall Street is almost unanimously bearish on oil going into 2026. As you said at the top there, oil dropped about 18 % last year and very few people think that it has any room to increase from here. Brent crude trading around$60 a barrel. WTI trading in the high 50s. And it's really because of this massive oversupply that you mentioned. The IEA expects there to be about 3.8 million barrels a day of excess supply this year, mainly driven by growth in non-OPEC producing countries such in the Americas, Canada, Brazil, Guyana, also US shale here, which despite the low prices continues to grow.

4:14And so that's really driving this period of very low prices, which of course is something that is favoured by President Trump. Now, this has been one of the most well-telegraphed oversupply instances in a very long time. So, the question really is when do investors start to see through the short-term oversupply imbalances and start to really look at the medium term, which looks much more constructive. When you say more constructive, Kevin, what does that mean, that there's going to be a floor under oil prices and we'll start to see some move to the upside? I mean, this is against a backdrop where we talk about data center build out and how we're going to need all forms of energy to power it and the increasing demand that we are seeing on the world's energy supplies.

5:02It's all needed. So do you anticipate then or what you're hearing from analysts who cover oil that prices will head higher? And if so, when? Well, that's right. In the medium term, demand looks very, very strong. Oil demand continues to grow despite the energy transition. And with the data center build out and lowering interest rates here in the US, if the economy stays strong, you'd expect that demand to continue to continue to grow. So eventually the world will work through this oversupplied market, which will then help to drive prices higher. But the big question is when that's going to happen.

5:45Now, I think people are saying really by the middle of this year, we should start to see some of that oversupply being worked through. So I would expect certainly the market to maybe start start moving around then.

5:59Tim Moore:Tim, on these prices going into 2026, at what point does OPEC Plus say, you know, we want to see higher oil prices? We'll kind of tighten the spigot, close the spigot a little bit, and we'll decrease supply so prices will go higher. Is that still a possibility? We think so at ClearStreet. You know, we've been watching this, and we weren't too surprised since last April with the catch-up that they had to do with the 2.2 million barrels a day, the curtailment they did the prior two years and catch-up of 2.7, 2.9 million last year through December. So we like what OPEC Plus has done and talked about since October.

6:41They vote this Sunday. We don't think that they're going to be raising the quota hikes for the first quarter. So this kind of lines up a little bit with what Kevin was alluding to. We light this up. We like when investors are bearish and think there's going to be low oil prices. And we see reason for oil price to maybe average possibly low 60s throughout the year. And what's more important to us is when does that roll off and start? And as soon as it starts rolling off that surplus supply, which we think will probably maybe get wrapped up by the one year anniversary of Liberation Day tariffs, maybe April, May, June, then you do have easier planning by E &P companies to drill and spending and usage, which is you want a tighter ban on oil price just for budget.

7:23So we feel pretty good about oil prices for next year. Nothing where it used to be in the 70s or 80s, but low 60s are good. And a lot of the stocks that we talked to and cover, they break even$54 for a free cash flow break.

7:37Tim Moore:So is low 60s enough, Tim, to drill baby drill as the president wants to see? I think if you have some of the stocks to be covered, like Magnolia Oil and Gas, yeah, they're doing 7 % net production growth probably next year. They might add a little bit more. I think it depends on your economics. But 50 is not great. And having a tighter band with less volatility probably this year than there was last year. And that's because the tariffs, maybe not as much of a headwind. OPEC plus quota is not as much of a headwind. I think that really helps to have a tighter band around the oil price,$5 each way instead of$10 to$15.

8:11Kevin, yeah, well, you know, and I just do wonder, too, Kevin, I mean, obviously, everybody's watching policy out of the White House. And we have a White House that's pretty clear about their view or the president's view when it comes to alt energy, whether it's wind and other. So do the integrated oil companies feel confident, though, ultimately, about drilling more? I mean, you said that we're looking for maybe prices to start to move up. I don't know whether it's mid-year or later on this year that the metrics get better. But I just do wonder about what really makes them wanting to increase supply even more because there is just so much out there.

8:54Well, the big buzzword here amongst the big oils is capital discipline. They keep preaching this to Wall Street, saying that we're not going to spend excess money on production. We're going to focus on shareholder returns. We're going to focus on investing in the very, very best projects that will give us the lowest break-evens in order to generate those dividends and share buybacks. And what's happened very interestingly last year is there was a bit of a departure between oil equities and the oil price. So, oil went down almost 20%, whereas the big oils actually rose about 10 % to 15 % last year.

9:30And the CEOs really believe that there's this capital discipline which will continue to drive that kind of outperformance. But the other thing that we've really seen, especially in the U.S. oil sector, is this continual grind for efficiencies. U.S. shale in particular continues to innovate, continues to drive down costs. They drill longer lateral wells. They put more power into their fracking. There's more changes in how they produce oil, which really allows them to drive down their breakeven and to make money at this$60 level. They're really on the cusp at the moment. Some companies really, really don't like it.

10:12But at this$60 level, U.S. oil production still continues to increase. Now, if we were to drop down into the 50s, I think that might change, and U.S. production may come off its record highs. But the industry really continues to surprise on the efficiencies. Yeah, it's kind of fascinating, but it makes sense, right, that they continue to do that. Tim, come on back in here, because you follow the Alt Energy companies, you follow oil and gas. What's more promising when you think about it, maybe medium term, longer term. What's more promising, the outlook for oil and gas or the outlook for those clean energy companies?

10:52Even though the clean energy companies outperformed the S &P 500 by almost 35 % last year, we think there's still room for them to do well this year if they have exposure to what we're calling the electricity shortfall. We cover several stocks with this exposure, whether it's MozTech, NYR Group, Bloom Energy, even Sunrun and Wildant Group. They're pretty well positioned because, as you probably know, the U.S. has been – their power grid was only adding about 1.5 % to 2 % a year of supply, but the demand is growing at 4 % to 5 % a year now. Half that caused by the new AI hyperscale data centers being built out.

11:26The other half caused from reshoring and EV charging, crypto mining, heat pumps. There's a lot of other reasons why. So we think there's a tailwind for the next three or four years of massive spending by the utilities. So a lot of the stocks we cover, their customers are utilities or commercial industrial, new plants, semiconductor plants. Even American superconductors should benefit from that. We think that the utilities could probably spend about 35 % more on the transmission distribution side over the next five years to really close that shortfall imbalance every year. It's pretty wide just the last three years.

12:00I mean, for about 40 years, the demand grew 1 % to 2 % a year in the U.S. Now it's growing at 5%, 6 % maybe this year.

12:07Tim Moore:But Tim, on the alt-energy side of things, with low oil prices, doesn't it decrease the incentive for investing in new technology? It could, depending on what you're looking at. We cover Sunrun, which is the biggest residential solar that's attaching battery storage. And we think their stock's positioned to keep going up. They're number one in market share. It's very affordable. And commercial, you need, like your speaker or two speakers ago was saying, you need just more than one energy source. You need natural gas. You need some oil. You know, you need solar, you probably need some wind. So I think there is room for alt energy to do pretty well.

12:46Maybe not the offshore wind that the Trump administration might not be that supportive.

12:50Tim Moore:OK, Kevin, I want to throw you a crazy question that sort of has like politics in it, because the U.S. policymakers like to talk a lot about energy independence. Is the U.S. energy independent? For all intents and purposes, largely is. I mean, clearly we still import a fair bit of oil, but that's mainly due to the makeup of the refining system here. We need heavy oil, which comes from overseas. But essentially, the U.S. is producing nearly 14 million barrels of oil a day, which is more than any other country has ever produced in history. It's at least 40 percent more than what Saudi Arabia is producing right now.

13:36So the U.S., for all intents and purposes, is as energy independent as it's been in decades.

13:45Tim Moore:Kevin, that said, it is much more expensive for the U.S. to extract a barrel of oil than it is for Saudi Arabia to extract a barrel of oil. It is. But it's at that crucial level. As long as it's profitable to do so, then companies here will continue to do so. I mean, clearly, yes, Saudi Arabia can extract oil much more profitably. But U.S. break-evens are maybe in the low 50s. So they can still extract oil profitability. Now, Saudi Arabia needs a much higher oil price to balance its budget. So that's something to take into consideration too. Well, oil politics always intertwined. A big thank you to both of you for joining us.

14:29Tim Moore:This is exactly the conversation, the roundtable that we wanted to have this afternoon. That was Bloomberg senior U.S. oil reporter Kevin Crowley. Also, Tim Moore, Senior Research Analyst over at ClearStreet, covering the clean energy transition as well.

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