Oil, gas and CO2 see an increasingly comfortable supply outlook

We hold a bearish view on the oil market, with strong supply increases from OPEC+ leaving the global market in large surplus throughout 2026, while demand growth is expected to be fairly modest once again in the year ahead. The surplus is expected to peak over the first half of the year, but with a surplus forecast for every quarter of 2026, global oil inventories should build throughout the year, putting pressure on both flat prices and timespreads. We forecast that ICE Brent will average US$57/bbl in 2026.

However, there are multiple supply risks to this view, given recent geopolitical developments. Firstly, there are still risks to Russian oil flows following US sanctions imposed last year. Russian exports are holding up for now, but it is taking longer for this oil to find a buyer, so we are seeing a growing amount of Russian oil at sea. If this continues, it should eventually feed through to lower Russian oil production, tightening up the market. However, for now, we are assuming Russian oil flows hold up and that supply chains adjust to these sanctions. This is something that Russia has managed to do well since its invasion of Ukraine. There will also be a lot of focus on how peace talks progress, with this having potential implications on Russian oil supply.

Supply risks have also re-emerged from Iran. Protests in the country and the potential for intervention are a risk to Iranian oil supply. Iran pumps around 3.2m b/d, so disruptions would be felt by the market. US President Donald Trump has announced plans for a 25% tariff on any country “doing business” with Iran, which may leave buyers of Iranian oil more reluctant to continue these purchases. However, China is the largest buyer of Iranian oil, and previously, the threat of secondary tariffs for purchases of Venezuelan and Russian oil was not enough to persuade China to reduce its purchases of oil from these countries. So, we are assuming the same when it comes to Iranian flows. In addition, with the US and China having reached a trade truce, we have to question whether President Trump would put this truce at risk by imposing further tariffs on goods from China. The bigger concern for the market is if we were to see military intervention in Iran, putting Iranian supply at risk and elevating regional tensions.

Developments in Venezuela pose some risk to oil supply in the short term. However, the market is more focused on the long-term supply growth we could see from Venezuela. The country produces around 900k b/d, and we expect growth in the short term to be very limited. It would take several years and significant investment to see more sizeable supply growth, which would have a more meaningful impact on the market. But this may prove difficult given Venezuela's unattractive investment environment, and the bearish outlook for the oil market does not help.

The medium to long-term outlook for the European natural gas market is bearish. The ramping up of global LNG export capacity will push the global LNG market into surplus, putting further downward pressure on European gas prices. We expect TTF to average EUR30/MWh in 2026, with more downside in the second and third quarters.

However, in the near term (remainder of the 2025/26 winter), we believe the market will remain well-supported, and there is the potential for prices to move higher. This is due to the fact that EU gas storage is well below the five-year average, and we believe storage could end this heating season at around 25% full, reaching levels similar to those in 2022 and leaving the market more vulnerable. In addition, investment funds entered the 2025/26 winter with record short positions in TTF, which leaves the market at risk of a short covering rallying if we were to see any supply shocks or extended cold spells.

The EU ban on Russian gas, which will ultimately see Russian gas flows to Europe stopping by 1 November 2027 at the latest, should be manageable. The EU imported around 16bcm of Russian pipeline gas via Turkstream in 2025, while LNG imports from Russia totalled almost 20bcm over the year. The LNG ban will likely lead to an adjustment in trade flows, while replacing pipeline flows should also be manageable, given the ramping up of LNG export capacity.

Between 2025 and 2027, the US has around 93bcm of LNG export capacity scheduled to start up, while from late 2026, we should also see significant capacity start-ups from Qatar, ensuring more than adequate supply for the EU. How adequate this supply will be depends on how Asian LNG demand performs through 2026. Asian demand was weak last year, due largely to China, where high inventories, stronger pipeline flows and weaker consumption weighed on LNG demand. And with plans for further pipeline capacity into China in the medium to long term, Chinese LNG demand may remain more modest than initially expected.

The surplus environment that is expected means that the global LNG market may try to resolve the surplus by trading down to levels where we see US LNG plants reducing operating rates. Basically, we could see the market trading down to the short-run marginal cost (SRMC) for US LNG producers at times during the peak of the surplus expected in 2027 and 2028. This is a floating level which will depend on where Henry Hub is trading, but assuming Henry Hub trading around US$4/MMBtu (not too far from calendar 2027 prices), it would equate to around EUR18/MWh.

A key downside risk to our price forecasts would be a scenario where a peace deal between Russia and Ukraine ultimately sees the resumption of some Russian gas flows to Europe. While we believe a restart of Russian gas flows is unlikely, this scenario cannot be ruled out.

European allowances (EUAs) have seen significant strength in recent months, with investment funds having built a record net long in the market. The constructive outlook for EUA prices is supported by expectations of a significant tightening in supply through 2026. However, the sizeable fund long leaves the market vulnerable to a pullback if we see funds taking profits.

Allowances under the EU ETS are set to fall significantly in 2026 – although if we look at the current auction calendar for 2026, it does not reflect this, with auctioned volumes set to fall by less than 1% year-on-year. However, the auction calendar for 2026 does not take into consideration several adjustments that we will see.

First, we are likely to see volumes reduced with allowances placed into the Market Stability Reserve (MSR) between 1 September 2026 and 30 August 2027.

Second, there will be some cancellation of maritime allowances in 2026, which will be equivalent to the difference between the number of allowances surrendered and verified emissions for the sector. This cancellation will result in a reduction in auction volumes.

Finally, 93.3m allowances are set to be auctioned in 2026 for REPowerEU. However, we believe this full volume will not need to be auctioned to hit the Commission’s €20bn revenue target under REPowerEU.

Combining all these factors suggests a steeper decline in supply next year, which should be supportive for prices. We expect EUAs to average €84/tonne in 2026, up from an average of around €75/tonne in 2025. If speculators continue to show a healthy appetite to buy the market, this leaves upside to our forecasts.

Meanwhile, we will start to see the phasing out of free allowances for Carbon Border Adjustment Mechanism (CBAM) sectors and the full phasing out of free allowances for the aviation sector. In addition, the maritime sector will see 100% of its emissions covered in 2026, up from 70% in 2025.

There are clear downside risks facing the EUA market. There have been some member states pushing for a delay in the phase-out of free allowances under CBAM, highlighting concerns within the region over the competitiveness of European industry. If these concerns grow, we cannot fully rule out steps that may delay the EU’s decarbonisation ambitions, which could mean the bullish outlook for EUAs may need to be dialled back.

We have already seen the EU decide to delay the implementation of ETS2, which will cover road transportation and buildings, from 2027 to 2028. While part of the delay was political, there was also a social element, given concerns over higher energy costs.