By Mia Gindis (Bloomberg) — There are increasing signs of a downturn in the oil market following US President Donald Trump's recent tariff threats, which have raised concerns about a possible oversupply.
West Texas Intermediate (WTI) crude prices have shifted into contango for contracts starting in February 2026 and several months thereafter. In a contango market, the prices for near-term contracts are lower than those for contracts further out.
This price adjustment that began late last week dashed hopes that the market could avoid a widely anticipated surplus, especially as new US tariffs against China hurt the demand outlook for the world’s largest crude importers.
The crude market is facing pressure from increasing production both within the OPEC+ alliance and outside of it. OPEC+ decided earlier this month to raise production quotas in an effort to regain market share.
Recent forecasts from banks like Goldman Sachs and Morgan Stanley have cut their oil price predictions for this year. If futures traded in New York continue to decline in the coming months, US oil drillers may face challenges. After closing last week at its lowest level since May, headline WTI futures experienced a slight uptick on Monday.
The negative sentiment is also evident in other parts of the market. As of Friday, US benchmark contracts for 2026 were trading below $60. Additionally, the December-December spread, a popular trade among oil-focused hedge funds, has fallen to its lowest point since June.
Sentiment in WTI second-month options is among the most pessimistic it has been in four months. Traders are betting that short-term futures will decline more than those further out, which often occurs during oversupply periods. The open interest in these calendar spread options has surged over the past year as prices have fluctuated in a range due to geopolitical tensions and OPEC+ supply increases.
This situation poses challenges for the shale industry, which typically requires prices above $60 a barrel to drill profitably for new wells. The Energy Information Administration predicts a slight decline in overall US crude production next year as fluctuating prices may discourage drilling, marking the first annual drop since 2021.
Despite this, many in the market believe that current conditions might lead to a tighter supply in the future, potentially pushing prices up.
“In many ways, this could be a positive indicator for oil prices in 2026,” said Jon Byrne, an analyst at Strategas Securities. “We need a shakeout to discourage US production in the coming year, along with adjustments in non-OPEC supply.”
At the moment, the nearest portion of the futures curve maintains a backwardation structure, typically indicating tight supplies. This is partly due to geopolitical risks, such as escalating drone strikes targeting Russian energy assets, ongoing US sanctions affecting major producers like Iran, and strong domestic demand.
“A sustained drop in WTI to around $50 seems unlikely unless there is a global recession. But on the other hand, it’s hard to see what could significantly increase prices,” said Pavel Molchanov, an analyst at Raymond James.