Recent shifts in the oil market suggest that Saudi Arabia’s decision to increase production after five years of output cuts was well-timed. In recent weeks, the kingdom has encouraged OPEC+ members to boost oil production despite potential economic slowdowns, a significant policy shift that has influenced oil prices, settling at a four-year low on Monday.
Although OPEC+ has agreed to increase output by nearly one million barrels per day (bpd) between April and June, the market currently reflects an expectation of tight supply as peak summer demand approaches. This expectation has resulted in a futures pricing structure resembling a “smile,” a phenomenon observed by Morgan Stanley analysts only briefly in February 2020.
For instance, the July Brent futures contract was trading at a premium of 74 cents per barrel above the October contract, indicating immediate tight supply through a structure called backwardation. Looking ahead, however, prices are projected to flip to a discount from November, a sign of oversupply in what is termed contango.
This inversion suggests that summer 2025 may mark the last significant instance of a tight oil market. The combination of backwardation and contango creates the unusual “smile” shape observed in current market dynamics.
Analysts highlight that expectations of an economic slowdown due to trade tensions have contributed to this market structure. OPEC+ has cited low stock levels and strong immediate demand as justifications for the July production increase.
According to the International Energy Agency (IEA), global oil inventories remain low, standing at approximately 7.647 billion barrels. As refiners prepare for the peak driving season, demand for crude oil is set to rise.
The IEA forecasts a demand increase of 1.3 million bpd in the third quarter of 2025. The additional OPEC+ production closely matches this anticipated demand rise, which indicates a precarious balance in the market.
Despite OPEC+’s increased supply, further projects in Brazil and Guyana are expected to enhance overall supply towards the end of 2025, leading to market softening due to slower demand growth.