Global Commodities: Going Against the Grain on Oil

Oil prices currently trade $7 to $10 above fair value due to transient geopolitical tensions and January supply disruptions rather than structural shifts. While market sentiment at International Energy Week remains bullish—citing potential Russian production cuts of 1 million barrels per day and conflict risks in Iran—global fundamentals point toward a softening market. Russia maintains historically high drilling activity and can likely bypass sanctions by offering discounts to India and China, sustaining production at approximately 9.5 million barrels per day. Furthermore, OECD inventory levels remain sufficient when adjusted for reduced global refining capacity, contradicting concerns over low stocks. With 70% of recent production disruptions already back online and a baseline scenario assuming surgical military actions that avoid energy infrastructure, Brent prices are projected to stabilize at $60. Significant production cuts of 2 million barrels per day will eventually be required to prevent excessive surpluses through 2027.