The Oil Market Isn't Oversupplied — It's Overexposed

For the better part of the past year, the dominant narrative in oil markets has been one of comfort. Global inventories are healthy. U.S. crude production is at record levels. Demand growth has moderated from post-pandemic highs. Analysts point to millions of barrels per day of spare capacity sitting inside OPEC and conclude the world is swimming in oil.

On spreadsheets, that conclusion looks reasonable.

In reality, it is dangerously misleading.

The oil market today is not oversupplied. It is structurally overexposed — exposed to geopolitical concentration; exposed to fragile logistics; exposed to sanctioned barrels that cannot flow; and exposed to a supply chain that depends far too heavily on a few vulnerable corridors.

Markets have mistaken volume for security. What we actually have is a tightly wound global delivery system where disruption risk is embedded into the very barrels that are supposed to provide comfort.

And when risk sits behind the supply itself, prices don’t glide higher — they spike violently.

Global oil demand has not stalled. The International Energy Agency continues to project growth of roughly one million barrels per day per year, driven largely by Asia, aviation recovery, and petrochemical feedstocks. Even in a slowing global economy, oil remains the backbone of transport, industry, and manufacturing.

At the same time, the United States has become the world’s most dominant producer. According to the Energy Information Administration, U.S. crude output has pushed above 13 million barrels per day — the highest sustained level any country has ever produced. American shale has been the marginal growth engine that kept global balances stable despite declining production in places like Venezuela, Nigeria, and sanctions-hit Iran and Russia.

This dual reality — steady demand and high U.S. production — creates the illusion of cushion.

But oil markets aren’t secured by how much is pumped. They’re secured by how reliably it can move . . . and that’s where the system is most vulnerable.

When analysts cite 3 to 5 million barrels per day of spare capacity, they are referring almost entirely to a handful of Persian Gulf producers — Saudi Arabia and the United Arab Emirates chief among them. That capacity is real in a technical sense, but its value as a stabilizer depends on geography.

Those barrels must still exit the Gulf.

They must still pass through the Strait of Hormuz.

They must still rely on the same shipping lanes and insurance markets that collapse first when tensions rise.

In other words, the global buffer is sitting inside the very zone where disruption risk is highest. Spare capacity that cannot be delivered is not spare capacity — it is theoretical comfort.

Oil markets are not diversified. They are geographically concentrated and politically conditional.

Roughly 20 million barrels per day of crude and petroleum liquids transit the Strait of Hormuz — about one-fifth of global consumption. No redundancy exists at scale. Pipelines bypass only a small fraction of flows. Tanker routes have no substitute.

When Iran threatens the Strait, markets don’t wait for closure. They price probability.

Freight rates rise, insurance premiums surge, cargoes hesitate, buyers hoard, sellers delay, and suddenly a market that looked well-supplied becomes tight overnight — not because oil disappeared, but because delivery became uncertain.

This is the defining feature of an overexposed market: reliability shocks masquerade as supply shocks.

Venezuela offers another form of exposure — barrels that exist but can’t stabilize markets. Years of underinvestment and sanctions have hollowed out production capacity and export reliability. Infrastructure is degraded. Blending materials are scarce. Politics override operations.

In every oil rally, Venezuela is cited as potential relief . . .

In every disruption, it proves incapable of responding in time.

Those barrels are stranded not by geology, but by governance.

The world’s most critical sectors — aviation, freight, petrochemicals, military logistics, and industrial production — cannot simply shut off when oil becomes volatile. Demand is rigid where supply is fragile.

That mismatch amplifies every disruption. When reliable demand meets unreliable supply geography, prices move sharply because consumption cannot adjust quickly enough to compensate.

The market is structurally primed for spikes.

America is often described as the new swing producer. That is true over medium time horizons. Shale can grow faster than conventional projects. Capital can be deployed quickly relative to offshore developments.

But shale is not instantaneous. Adding meaningful volumes still takes months. Crews must mobilize, wells must be drilled and completed, and infrastructure must absorb the increase. Even in an aggressive surge, the U.S. might add several hundred thousand barrels per day within a quarter — not millions in weeks.

And critically, U.S. barrels do not replace Gulf barrels one-for-one. Refiners can’t seamlessly swamp our heavy sour grades for light shale crude. Export logistics impose bottlenecks and domestic gasoline prices still follow global benchmarks, regardless of U.S. production levels.

The United States can soften shocks . . . it cannot eliminate them.

The Strategic Petroleum Reserve remains a critical U.S. energy-security tool. Alongside coordinated stockpiles held by International Energy Agency members, emergency release can inject supply quickly, calm markets, and buy time during short-term disruptions. When used decisively and in coordination, they matter.

But the Strategic Petroleum Reserve is a backstop, not a solution.

The Reserve is finite, and sustained drawdowns weaken future protection. Markets distinguish between emergency stabilization and structural supply, and repeated releases reduce the tool’s signaling power rather than eliminating risk premia.

Just as importantly, Strategic Petroleum Reserve barrels do not bypass delivery constraints. Released oil must still move through limited pipelines, reach compatible refineries, and navigate regional bottlenecks. Under the Jones Act, moving crude or products between U.S. ports requires U.S.-flagged vessels — a limited and costly fleet that can slow redistribution in a crisis.

International Energy Agency-coordinated releases face similar limits. They work best as temporary shock absorbers, not as substitutes for reliable supply and resilient logistics.

Strategic reserves can soften volatility. They cannot resolve the structural exposure created by concentrated supply, chokepoints, and fragile delivery systems — and markets price that reality quickly.

Even as the world’s largest producer, the United States remains fully exposed to global price formation. American households don’t buy “U.S.-only oil.” They buy products priced off global risk. Allies rely heavily on Gulf supplies. Inflation remains tied to crude volatility.

The world’s overexposure becomes America’s economic problem.

What appears to be surplus is actually a convergence of structural vulnerabilities – supply concentrated in politically unstable regions, spare capacity trapped behind narrow chokepoints, sanctioned barrels that cannot reliably reach market, logistics so fragile they now dictate price behavior, and demand that remains stubbornly inflexible in the face of disruption. This is not a resilient system flush with excess oil; it is a precarious one, disguising fragility as comfort.

The oil market hasn’t build resilience — it has built dependency. And dependency on unstable geography is not a cushion, it’s a trigger.

For the United States, energy security must be measured not by how much oil the world produces, but by how much of it can be reliably delivered when crises emerge.

Because in oil markets, it’s not the barrel in the ground that matters . . . it’s the barrel that actually shows up.