Oil prices headed to US$60 amid further OPEC+ production increases

Major investment banks are warning Australian investors of a challenging period ahead for oil markets, with Citi forecasting Brent crude to bottom at US$60-62 a barrel heading into 2026 as OPEC+ unwinds production cuts and non-OPEC supply accelerates.

The bearish price outlook comes despite mounting geopolitical tensions across key producing regions, creating a complex risk environment for energy investors to navigate.

OPEC's capacity cushion shrinks

OPEC's voluntary production group is set to meet on 5 October to discuss the continued unwinding of 1.66 million barrels per day (bpd) in cuts from the pandemic era. RBC Capital Markets expects the group to approve another incremental addition of 137,000 bpd for November, matching the September increase.

The key issue is that most OPEC+ members (excluding Saudi Arabia) are already producing at their maximum capacity. When OPEC+ announces a production increase, the actual barrels they can deliver falls far short of that headline number because most countries are tapped out. This means OPEC+'s advertised "spare capacity" is largely fictional. The real supply cushion available to respond to demand spikes or disruptions is much smaller than official figures suggest, which is bullish for oil prices since the market is tighter than it appears.

RBC analysts believe Saudi Arabia is reluctant to permanently cover for other producers at its own expense. The Kingdom will likely be cautious with adding more production. But if negotiations on new OPEC+ production benchmarks stall, or if members ignore their commitments, Saudi Arabia could bring back its barrels more quickly.

Russia-Ukraine conflict intensifies

Ukrainian attacks on Russian energy infrastructure are expected to increase, according to senior diplomats and military leaders consulted by RBC. Ukraine has already taken out around 20% of Russia's refining capacity.

Russia's energy export revenue has given it a major advantage in recruiting soldiers. Senior US military officials estimate Russia can sustain the war through the end of 2026 unless its finances change significantly.

The Trump administration does not appear to be discouraging Ukrainian attacks on Russian energy assets, unlike the previous administration. RBC understands that officials are pressuring NATO allies like Hungary and Turkey to find alternative energy sources. Increasing sanctions on Russian energy is still under discussion, despite concerns about inflation.

China's strategic stockpiling

Senior officials suggest China has made a strategic decision to accelerate filling its strategic petroleum reserves as a hedge against supply disruptions and prepare for a potential future confrontation with the US over Taiwan.

China remains a prolific purchaser of Iranian and Russian barrels, and a serious effort to interdict these flows through secondary sanctions or physical disruption could put around 25% of Chinese imports at risk. This stockpiling activity is providing partial support to oil prices and moderating the bearish outlook, according to RBC.

Implications for Australian energy stocks

Separately, Citi lowered its 2026 oil forecast to US$62 a barrel from US$65, with Woodside Energy and Karoon Energy experiencing the largest earnings revisions. Despite the lower oil price outlook, Citi kept its target prices unchanged across the exploration and production sector.

Citi favours Santos and Karoon Energy, with the former performing well as it exits a heavy capital spending phase and moves toward higher free cash flow. Karoon was also highlighted as the top value play, priced at US$51 a barrel oil with strong catalysts expected through 2026. Meanwhile Beach Energy was flagged as the most expensive but has the lowest oil exposure.

For gas, Citi has raised its 2026 Japan-Korea Marker forecast by about 8% to US$10.8 per mmbtu. However, weak Asian demand points to a soft outlook for the medium term.

The bottom line: The energy market faces a challenging environment where oversupply risks outweigh any geopolitical upside. While OPEC+'s actual spare capacity is lower than advertised due to production constraints, the group is still committed to unwinding cuts and bringing more barrels to market.