Correction was always coming but it was not obvious when. The answer arrived yesterday. Better than expected US inflation readings coupled with considerable drawdowns in US oil stocks attracted some money back to risk assets or at least those with short positions felt inclined to cover. As the Federal Reserve is trying to tame inflation without encouraging recession consumer prices rose in February less than expected. Headline inflation was +2.8% with the core reading at +3.1%. The market is now pricing in two additional rate cuts for this year. The data is undeniably conducive for the US Administration, which can argue that inflation is discernibly unaffected by tariffs. Yet, it must be remembered that as of February only China was punished with excise duty and as the trade war with other trading partners intensifies yesterday’s brightening of investors’ mood could prove brief.

In addition to the auspicious US inflation figures, the upbeat view of salient forecasters on world oil demand, as discussed below, contributed to yesterday’s oil price rally, which was magnified by considerable drawdowns in US oil inventories. The build in crude oil stocks was less than expected as imports from Canada dived by 400,000 bpd on the week. Ongoing refinery maintenance forced product stockpiles to decline with gasoline stocks plunging by 5.7 million bbls and distillate inventories by 1.6 million bbls, leading to a 6 million bbls fall in commercial reservoirs. It was somewhat refreshing to see oil prices influenced by actual fundamental developments, however, it won’t be long before the focus shifts back to macropolitical and economic factors with dubious outcomes.

Admirable Optimism

Amidst the ongoing uncertainties of the impact US tariffs might, could, or should have on economic growth and consequently on the balance of oil supply and demand, the optimism displayed by major forecasters is unshaken. This is the message both the EIA and OPEC disseminated when they released their latest findings with the IEA report due out this morning. Global oil demand forecasts remained unchanged, notwithstanding growing concerns amongst investors about the health of the global economy mirrored in the latest sell-off in equities.
To begin with the EIA, global oil demand was left untouched for this year at 104.13 mbpd and upgraded by 120,000 bpd to 105.30 mbpd for 2026. This year’s demand growth retreated to 1.27 mbpd, only because last year’s estimate was increased retrospectively. Next year’s growth was revised upwards to 1.17 mbpd. Comparatively stable demand projections entail unchanged oil balance and therefore minimal stock movements. Looking at the supply side shows how misplaced this thought has proven to be.

Working our way backwards, the amendments in OECD stocks are unmistakenly conspicuous. The EIA puts them considerably lower than last month. Starting from the next quarter these changes are -53 million bbls for 2Q, -72 million bbls for 3Q, and -81 million bbls for 4Q. Stockpiles in the developed part of the world will finish next year at 2.764 billion bbls, 143 million bbls less than estimated in February.

These are massive and almost unprecedented alterations. Given that the demand side of the equation was broadly consistent with last month’s figures, attention turns to supply. Digging deep reveals, that the answer is hidden in OPEC production data, something the EIA provides estimates for. In the 2Q-4Q 2025 period, the group’s production levels were downsized by 400,000 bpd and for 2026 the downside correction was also 400,00 bpd. The prognosis for members with quota was left unchanged therefore the exempted countries are responsible for the cut, namely Iran and Venezuela, which are or might be sanctioned by the US. Firstly, it is a bold call, and secondly, it is somewhat perplexing to see the assumed impact on OECD stocks to be as much as 81 million bbls for 2025 and over 140 million bbls in 2026. It is also challenging to reconcile these figures with the EIA’s price prediction as the average price of Brent for this year was left unchanged and upped by a paltry (when compared to the 143 million bbls downward revision in stockpiles) $2/bbl for 2026.

And now, over to OPEC. The group’s buoyancy remains intact despite lingering trade issues. Global economic growth is unaltered as expansion is seen at 3.1% this year and 3.2% in 2026. In the Feature Article, there is a passing remark that trade concerns will create a volatile trading environment but resilient consumer demand from emerging markets will underpin sanguine growth. Consequently, global oil demand and oil demand increase were left unchanged for this year and for 2026.

Because supply from non-DoC producers is also seen steady compared to the previous report, the call on DoC oil is stagnant. As a result, OECD inventories are also unchanged from last month, logic dictates. Logic, however, is proven wrong for two reasons: there has been a decent reduction in end-2024 inventories (17 million bbls, to be precise), which filters through 2025 and 2026. Additionally, and based on January and February figures, DoC production in the first two months of the year was lower than anticipated (40.82 mbpd), which will likely result in a steeper-than-anticipated drawdown in global stocks (1 mbpd as opposed to a marginal build) in 1Q and accordingly in ensuing quarters. Southernly revised stocks lead to upwardly amended price forecasts and the latest prediction suggests an average Brent price of around $80/bbl for the whole year, some $4/bl costlier than previously thought. This is higher than the EIA estimate of $74/bbl and significantly above the 2025 Brent strip of around $69/bbl.

There are many constantly moving parts in the formation of oil prices. One of the rather important elements is output from the producer alliance. The combined output level stood at 41 mbpd in February, secondary sources reckon, a monthly increase of close to 400,000 bpd. Continuous pledges to compensate for past sins of overproduction have not been fulfilled. Last month, once again, Kazakhstan was the shining example of disobedience as it pumped 140,000 bpd more than required. It is impossible not to notice that cohesion within the group is fraying and in case barrels, in an orderly manner or otherwise, will be re-added to the market, the seemingly tight oil balance envisaged by OPEC will take a turn for the worse.
 

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