Something bizarre is happening in the oil market in 2025, and almost nobody in mainstream financial media wants to talk about it.
On the ground, the signals couldn’t be clearer:
- Upstream investment has been anemic for years. Major oil companies are still living off projects sanctioned before 2020.
- Spare capacity is thinning fast — Saudi Arabia’s cushion is the smallest in decades, and non-OPEC supply growth (outside U.S. tight oil) is slowing dramatically.
- Refinery runs are near record highs, inventories in key hubs are below five-year averages, and physical differentials for prompt barrels (CIF Rotterdam, Singapore, Dubai, etc.) have spent most of the year in steep backwardation.
In a rational world, all of this would translate into sharply higher crude prices. Instead, Brent and WTI have spent months grinding lower or sideways, regularly testing the lows (Bent below $65s) — levels last seen when the world was awash in COVID demand destruction.
So what gives?
The answer lies in one of the most lopsided imbalances in financial history: the gargantuan size of the “paper” oil market versus the physical market it is supposed to reflect.
Every single day:
- ≈100 million barrels of actual physical crude and products change hands.
- ≈5 billion barrels of oil-linked contracts (futures, options, swaps, CFDs, ETFs, spread trades, you name it) are traded on screens around the world.
The paper market is 50× larger than the physical market. Fifty. Times.
When a market is that detached from underlying supply and demand exists, price discovery stops being about fundamentals and starts being about narrative, momentum, algos, risk-parity funds, CTA trend models, and macro tourists who couldn’t locate the Permian Basin on a map.
Right now the dominant narrative — endlessly repeated on Bloomberg, CNBC, and trading-floor Squawk boxes, and X — is “oil glut.” Record U.S. production, slowing China, OPEC+ pumping again, SPR releases, mild winter forecasts… the laundry list goes on. Most of these talking points contain a grain of truth, but none of them justify $70 oil when physical markets are this tight.
Yet because the paper market is so enormous and so levered, the narrative becomes self-fulfilling. Speculators (hedge funds, prop desks, retail CFD punters) pile into short positions or spread trades betting on lower prices. Managed-money net length in Brent and WTI has been near record shorts for months. Each new headline confirming “glut” triggers another wave of algorithmic selling, pushing prompt futures lower, which drags the entire pricing structure with it — even as tankers are bidding frantically for prompt cargoes and refiners are scrambling for barrels.
We have literally never seen a disconnection this extreme. Not in 2008, not in 2014–2016, not even during the negative-oil fiasco of 2020. The oil market has detached from physical reality and is now almost entirely sentiment-driven.
History tells us these episodes don’t end quietly. When the paper tail has wagged the physical dog for too long, the eventual correction is violent. One geopolitical shock, one colder-than-expected winter, one major field outage — any catalyst that forces traders to cover shorts and scramble for real barrels — and the price spike can be breathtaking.
Until then, we’ll keep watching Brent flirt with the low $70s while refinery margins scream, physical tightness and shale executives warn they can’t grow production at these prices.
The oil market isn’t broken. It’s just forgotten what it’s supposed to be pricing.
