Will a global oil glut push prices lower in 2026? | Counting the Cost

Key Concepts

• Oil Market Surplus: Projected oversupply of oil in 2026, with potential implications for prices, producers, and consumers.
• OPEC+ Production Pause: The alliance's decision to halt production increases for the first three months of 2026.
• Yuan Internationalization: China's efforts to increase the global use and acceptance of its currency.
• Dollar Dominance: The current preeminence of the US dollar in global finance and trade, and potential challenges to it.
• South Africa's Credit Rating Upgrade: S&P Global's upgrade of South Africa's credit rating for the first time in 20 years, signaling economic improvement.
• Philippine Rice Market: The impact of import bans and global oversupply on local farmers and international prices.

Oil Market Dynamics and Forecasts

The global oil market is facing a potential oversupply in 2026, with the International Energy Agency (IEA) forecasting a surplus of over 4 million excess barrels per day. This oversupply typically leads to lower oil prices, benefiting consumers through reduced transportation, shipping, and flight costs, but potentially straining the budgets of oil-dependent governments.

OPEC+ Response: Despite initial concerns about a glut, the Saudi-led OPEC+ alliance had been unwinding output cuts to regain market share. However, their own forecasts now suggest that demand will only match supply. Consequently, OPEC+ has announced a pause on additional production increases for the first three months of 2026.

Divergent Forecasts: There is a notable discrepancy between forecasts from different energy agencies. The IEA predicts a surplus, while OPEC+ anticipates market balance. The US Energy Information Administration (EIA) is closer to OPEC's forecast, with a difference of about 200,000 barrels per day. This divergence is attributed to differing perspectives on global economic factors and how oil barrels are counted.

Factors Influencing Supply and Demand:

• China's Strategic Reserves: China's cessation of oil purchases for strategic reserves in October, despite oil being in backwardation (a market condition usually favorable for stocking), is a factor.
• Sanctions on Russia: While sanctions can cause initial market anxiety, oil often finds its way to the market eventually.
• Stored Oil at Sea: A significant amount of oil is stored at sea, raising questions about potential double-counting of barrels.
• Transition to New Energy: The market is at a crossroads between traditional oil and new energy sources for electric vehicles and AI, which require significant electricity.
• Projected Demand Growth: Despite the push for renewables, the IEA predicts oil and gas demand will rise by 13% by 2050 compared to 2024, a reversal from previous studies.

Geopolitical and Economic Implications:

• Government Budgets: Oil-dependent nations, such as Russia, rely heavily on energy sales to fund expenditures, including military operations.
• India's Oil Purchases: Reports suggest India might reduce Russian oil purchases as a quid pro quo for the US reducing tariffs.
• US-Saudi Arabia Partnership: A significant partnership between the US and Saudi Arabia is focusing on energy deals, including liquefied natural gas infrastructure, aiming to strengthen both energy sectors.

Expert Commentary: Cornelia Mer, CEO of Mayer Resources, highlighted the confusion arising from differing forecasts. She noted the IEA's shift from its "net zero" edict to a more realistic stance on oil and gas investment. Mer also pointed out the complexities in counting barrels and potential "known unknowns" in the market.

Impact on Consumers and Refiners: Goldman Sachs predicts crude oil to average around $56 a barrel next year. However, prices at the pump may not necessarily decrease due to refining margins, which are more regional than crude prices.

OPEC Budgetary Needs: OPEC countries generally need oil prices around $80 a barrel to balance their budgets. While Saudi Arabia's non-oil sector now contributes over 50% to its GDP, Vision 2030 aims for further diversification away from oil dependency.

The Growing Global Role of the Yuan

China is actively promoting the internationalization of its currency, the yuan (also known as the renminbi or RMB), driven by a desire for protection against US financial sanctions and economic volatility.

Current Status:

• The yuan was the fifth most traded currency globally last year.
• China settles nearly a third of its $6.2 trillion trade in its own currency, up from 20% in 2022.
• The yuan accounts for 8.5% of global currency transactions, up from 7% in 2022.
• However, yuan-denominated assets constitute only about 2% of global central bank reserves, compared to 58% held in dollars.

Drivers for Internationalization:

• US Sanctions and "Weaponization" of the Dollar: Following Russia's invasion of Ukraine and subsequent US sanctions, China has heightened its efforts to internationalize the yuan, fearing similar actions against itself.
• Concerns about Dollar Volatility: Unpredictable US economic policies and the use of financial sanctions by Washington have increased concerns among global actors.
• Protection for Exporters: A stronger global role for the yuan can shield Chinese exporters from dollar swings and mitigate the impact of US penalties.
• National Security: China views yuan internationalization as a measure to prevent the US from excluding it from the global financial system.

Constraints on Yuan's Rise:

• Tight Capital Controls: Beijing maintains strict control over the yuan, limiting its free exchange and the flow of money in and out of China.
• Lack of Free Convertibility: Unlike Western currencies, the yuan cannot be freely exchanged without government oversight. This makes it difficult for foreign companies to repatriate profits from China, requiring numerous approvals and tax verifications.
• Fear of Capital Flight: The Chinese government may be concerned that free convertibility could lead wealthy Chinese citizens to move their money offshore, potentially weakening the yuan.
• Maintaining Exchange Rate Stability: China aims to keep the yuan within a specific band against the US dollar (around 7 to 7.1) to avoid trade friction.

China's Strategies to Boost Yuan Use:

• Currency Swap Deals: China has signed swap agreements with over 40 countries.
• Bilateral Trade in Local Currencies: Encouraging trade settlements in local currencies.
• Yuan Lending to Developing Countries: Expanding financial support in yuan.
• China Cross-Border Interbank Payment System (CIPS): An alternative to SWIFT for international transactions, posing a potential threat to dollar dominance.
• Digital Yuan Pilot: The central bank is testing a digital version of the yuan.

Expert Perspectives: Shan Ryan, Director and Founder of the China Market Research Group, stated that the use of the RMB has advanced very rapidly in the last three years, largely due to the US "weaponizing" the dollar and Swift system. He believes that until China allows free convertibility, the yuan cannot become a true reserve currency. Ryan also noted that many countries in the "global majority" are looking to diversify away from the US dollar due to concerns about US policy volatility and the risk of being caught in geopolitical crossfire. He predicts the RMB will become a reserve currency over the next 20 years, though not in the immediate future due to convertibility issues.

China's Ultimate Goal: Chinese officials state they do not aim to replace the dollar. However, economists suggest Beijing's trade clout could erode dollar dominance. Ryan believes China's primary motivation is self-protection and de-risking from the US, rather than directly challenging American dominance. This includes building indigenous innovation in areas like semiconductors and AI to reduce reliance on Western technology and fearing future US administrations might weaponize the dollar against China.

South Africa's Economic Turnaround and Credit Rating Upgrade

South Africa's economy is showing signs of recovery, marked by stronger growth prospects, an improving fiscal outlook, and tighter debt control. This has led to a significant development: S&P Global has upgraded the nation's credit rating for the first time in two decades, affirming a positive outlook.

Key Indicators of Improvement:

• Credit Rating Upgrade: S&P Global upgraded South Africa's credit rating, moving it two notches below investment grade. This is the first upgrade in 15 years.
• Structural Reforms: The country is benefiting from structural reforms implemented under President Cyril Ramaphosa's government.
• Budget Surpluses: South Africa has recently achieved a record of budget surpluses.
• Improved Power Supply: Rolling power blackouts have largely been avoided this year.
• Eskom's Profitability: The state power company, Eskom, has returned to profit after years of relying on government bailouts.
• Debt Reduction Plan: Public debt is projected to fall gradually to 75% of GDP by 2028.
• Lower Inflation Target: The government has reduced its inflation target to 3% for the first time this century.

Historical Context: South Africa's economy was downgraded to "junk status" in 2017, and it lost its last investment-grade rating from Moody's in 2020. The current upgrade signifies a threshold point in the country's growth recovery, signaling to investors that South Africa is becoming a more attractive place to invest.

Factors Contributing to the Recovery:

• Macroeconomic Management: The National Treasury has been recalibrating its medium-term expenditure framework, focusing on debt-to-GDP ratios, budget deficits, and managing the public sector wage bill.
• Fiscal Recovery: Ratings agencies have acknowledged and signaled belief in South Africa's fiscal recovery.

Impact on Borrowing Costs and Consumers:

• Lower Interest Rates: The credit rating upgrade and lower sovereign spreads are expected to lead to a lower interest rate environment.
• Benefits for Consumers and Businesses: A lower interest rate environment makes it easier for consumers and businesses to operate.
• Potential for Rapid Translation: The positive impact on interest rates could translate relatively rapidly, potentially within the next quarter, feeding into a more positive outlook for growth in the next financial year.

Expert Commentary: Professor Harun Borat from the University of Cape Town emphasized the significance of the upgrade as a signal to investors. He noted that ratings agencies tend to move in concert, suggesting other agencies might follow suit. Borat highlighted the steady recovery in macroeconomic management over several years, including a solid plan to moderate debt-to-GDP levels and bring the budget deficit under control. He also addressed the criticism that ratings agencies systematically judge African nations more harshly, but expressed confidence that the current developments will lead to a lower interest rate environment, benefiting ordinary South Africans.

Philippine Rice Market Challenges

The Philippine government's ban on rice imports, intended to support local farmers, is having a significant impact on both domestic prices and global markets.

Government Intervention:

• Import Ban Extension: The Philippines has extended its ban on rice imports until the end of the year, with a possibility of extending it through April.
• Objective: The ban aims to raise prices for local crops and help farmers recoup losses.

Impact on Local Farmers:

• Low Farmgate Prices: Filipino farmers have been forced to sell their produce at extremely low prices, as low as 10 US cents per kilo, a significant drop from 30 cents two years ago.
• Reduced Incomes: The Federation of Free Farmers estimates a nearly $800 million drop in farmers' incomes.
• Mounting Debts and Hardship: Farmers are facing mounting debts, and some children have had to stop attending school due to their families' financial struggles.
• Weather Challenges: Adverse weather conditions exacerbate the difficulties faced by farmers.

Impact on Global Markets:

• Plunging Prices in Vietnam: Prices have fallen sharply in Vietnam, a major supplier of rice to the Philippines.
• Aggressive Price Cutting by Exporters: Countries like India, Thailand, Vietnam, and Cambodia are aggressively cutting prices to gain market share due to a global oversupply.

Consumer Benefits and Farmer Struggles:

• Low Prices for Consumers: Consumers in the Philippines are currently enjoying some of the lowest rice prices in over a year, with increased supply from India.
• Delicate Balancing Act: The situation presents a challenge for governments, requiring a balance between supporting domestic farmers, ensuring sufficient supply, and keeping rice affordable for consumers.

Expert Analysis: Alisher Mir Zabayv, an economist at the International Rice Research Institute, explained that the global oversupply is driving down prices as exporting countries compete for market share. He highlighted the delicate balancing act required to support farmers while maintaining affordable food for the population.

Government's Tariff Reductions: In addition to the import ban, the government had previously cut tariffs on imported rice, which also contributed to the falling prices and impacted farmers' incomes.

Conclusion: The Philippine rice market exemplifies the complex interplay between government policy, global market dynamics, and the livelihoods of local producers. While the import ban aims to protect farmers, it has contributed to global price drops and highlights the ongoing challenge of ensuring both farmer profitability and consumer affordability.