A glaring mismatch between benchmark oil prices and expectations of a looming supply overhang has created an imbalance that could end badly for traders. Major energy forecasting agencies, banks and producers expect oil supplies to far outstrip demand through the coming months and well into 2026 due to both an expected slowdown in demand growth and sharp production increases from OPEC+ and other major producers including the United States, Canada, Brazil and Argentina. The International Energy Agency projects global oil production will climb by 2.5 million barrels per day to 105.5 million bpd in 2025, then by another 1.9 million bpd in 2026, with a whopping 4.1 million bpd jump expected for Q1 2026.

And the U.S. Energy Information Administration also expects sizable stock builds this year and next.

Meanwhile, global consumption is expected to be only 103.74 million bpd this year and 104.44 million bpd next year.

In response, spot Brent crude prices have already softened, sliding from over $73 a barrel on July 30 to just under $66 this week, also reflecting the waning summer oil demand in the northern hemisphere.

But the longer end of the futures curve is telling a different story.

THE SMILE
In the oil market – as in other big commodity spaces – participants can buy contracts for future delivery months or years ahead, letting producers, refiners, consumers and speculators either hedge or bet on price moves. The forward curve reflects those expectations and comes in two flavours. Backwardation – when prompt prices sit above future prices – usually signals a tightening market and nudges producers to pump more. And contango – future prices above prompt levels – normally points to oversupply, incentivizing storage over drilling activity. Given that a chorus of experts is calling for significant oversupply in today’s oil patch, you’d expect Brent’s forward curve to be steeply in contango through 2026. Instead, it’s in pronounced backwardation from the prompt October contract out to March 2026, then largely flat to September 2026 before swinging into strong contango. The result: a forward curve “smile”. That shape is rare and puzzling. If a sizeable overhang is indeed barrelling down on the market, traders would very likely need to store more crude in tanks or, in a pinch, even on ships in the coming months.

This means that a strong price correction may be coming.

OPEC TO THE RESCUE
What could be driving this mismatch between prices and forecasts?

One explanation could be that investors expect OPEC+ to step in if necessary. The group, which includes the Organization of the Petroleum Exporting Countries, Russia and other producers, has sharply increased output since April when it started unwinding 2.2 million bpd of supply cuts, part of a series of cuts introduced since 2022 to prop up prices. The move, led by OPEC’‘s de-facto leader Saudi Arabia, was aimed at re-establishing cohesion within the group after several members exceeded production quotas.

Riyadh’s push to pump more crude also appears to be aimed at increasing its own production share in the global market by squeezing higher-cost producers around the world, such as U.S. shale producers.

So even though OPEC+ could reintroduce cuts in the fourth quarter to head off a swelling glut, that belief seems like quite a stretch. First, members that have ploughed capital into new capacity in recent months may balk at having to quickly reverse course. New cuts would also undercut Saudi efforts to claw back market share. And slashing supply risks lifting prices, precisely what U.S. President Donald Trump has urged OPEC to avoid.

GEOPOLITICAL MESS
Maybe geopolitical confusion explains the smile as investors are struggling to price Trump’s trade wars and the sprawl of on-and-off tariffs that – at some point – are likely to sap manufacturing and trade flows, clipping oil demand at the margins. Meanwhile, investors also have to factor in the potential tightening of U.S. and European Union sanctions on Russia and Iran, which could further complicate supply chains. Trump’s threat of secondary sanctions on buyers of Russian crude – particularly China and India – could certainly scramble global trade.

And yet, geopolitical jitters are hardly new to oil markets, and they certainly can’t fully explain the curve’s grin.

Finally, it could simply be that traders don’t believe the market forecasts.

But even if that’s the case, the stubborn disconnect should make them nervous, particularly given all the unknowns. If the IEA’s overhang materializes, the math argues for inventory builds and a forward curve tipping into contango. So traders need to watch out. This deepening smile could well end in tears. Enjoying this column? Check out Reuters Open Interest (ROI),your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn and X.