Han Dieperink: Oil heading for $50
This column was originally written in Dutch. This is an English translation.
By Han Dieperink, written in a personal capacity
The price of oil is at its lowest level in three months. Brent crude is just under $80 a barrel and WTI crude is slightly below that. It looks like a breather, but in reality this is part of a long-term trend.
Several factors are currently contributing to the lower oil price: a growing oil surplus, a cartel losing its power, countries allowing their budgets to dictate production levels, strategic reserves that are dampening price spikes, and demand that is approaching its peak. Together, these could push the price towards $50. The market is not yet taking sufficient account of this.
Supply is growing faster than demand
The crux of the matter lies in the International Energy Agency’s (IEA) first outlook for 2027. The IEA expects global supply to increase by eight million barrels a day, whilst demand is set to grow by just two million barrels. That difference of six million barrels a day is no minor detail, but a clear surplus.
If more oil is pumped every day than the world uses, the price can only go one way, and that is down. The immediate trigger for the recent fall is the impending agreement between the United States and Iran. As soon as that is signed, Tehran will be allowed to sell again and the Strait of Hormuz will open. Every barrel that leaves the Gulf once more increases the surplus.
The cartel is losing its grip
The most significant new development is that the United Arab Emirates is leaving OPEC after 59 years. The immediate consequences are limited, as the country accounts for around 3% to 4% of global production.
The significance lies mainly in the signal it sends. Abu Dhabi has invested heavily to bring production up to five million barrels a day, but was not allowed to sell more than around 3.5 million barrels due to the cartel’s agreements. The Emirates are already balancing their budget at below $50, whilst Saudi Arabia needs $90 or more. Abu Dhabi therefore sees no reason to restrict production any longer.
OPEC’s market share has meanwhile fallen from just over half to no more than 35 per cent, the lowest level since the 1980s. Even before the crisis with Iran, OPEC was barely managing to keep the price at $65. Since that crisis, it has been completely unable to do so, and $50 is a distinct possibility.
The budget determines supply
Anyone wishing to understand the oil market must realise that the price has various equilibrium levels. In a normal market, supply responds neatly to price: if the price falls, production drops. With oil, this often does not work that way, as many exporters allow their budgets to dictate their production levels. A country that needs a fixed amount of oil revenue will, in fact, produce more when the price falls. If the price halves, such a country has to sell almost twice as much to earn the same amount.
This applies particularly to countries that are short of cash, such as Russia, but Saudi Arabia also needs well over $90 per barrel. If the price drops towards $50, the normal self-correcting mechanism reverses: instead of turning off the tap, these countries actually pump even harder. As a result, the market does not become more stable at lower levels, but more volatile, and a decline can become self-reinforcing.
Strategic reserves smooth out the peaks
One underestimated factor is the role of strategic reserves. Over the past three months, the US government has released around 75 million barrels onto the market to curb the price rise during the conflict. China has a similar tool at its disposal. What was once intended to prevent shortages now acts as a means of exerting pressure against temporary spikes: selling when the price is high and buying back later at a lower price. In this way, governments impose an upper limit on the price, whilst the underlying forces are pointing downwards. Moreover, US shale producers operate profitably between $60 and $80, ensuring that supply remains stable even at lower prices.
Demand is approaching its peak
Behind all this lies a slow but irreversible process. Every oil crisis destroys part of the demand, and the energy transition is amplifying that effect. As countries such as China electrify their road transport, demand for oil is levelling off. In the United States, petrol consumption has been falling for years due to more fuel-efficient engines, hybrids and electric vehicles. Demand is no longer the reliable driver of growth it once was.
What this means for the portfolio
In the market, forecasts for the fourth quarter of 2026 are already being revised downwards from $90 to $80, as the geopolitical risk premium is disappearing. From now on, a cap has been placed on that premium through the deployment of strategic reserves. If the structural surplus, a divided OPEC, budget-driven production and peaking demand all coincide, $50 is not an extreme scenario, but a real possibility.
The balance of risks has shifted from a price spike to a price fall. A lower oil price reduces costs, curbs inflation and thus affects interest rates. Such a fall ultimately acts as a major tax cut, which is good news for shares.