Oil prices plunged more than 2% on Tuesday as the International Energy Agency (IEA) warned of a significant oversupply by 2026, and due to ongoing trade tensions between the US and China, the world's two largest economies.

Brent crude futures fell $1.38, or 2.2%, to $61.94 per barrel at 11:47 a.m. ET (15:47 GMT), while US West Texas Intermediate crude fell 2.1%, or $1.24, to $58.27. Both contracts are at their lowest levels in five months.

In the previous session, Brent closed up 0.9%, and US WTI closed up 1%. "The renewed tensions between the US and China will also be a pressure point for crude oil as the Chinese economy could be in question if the tensions continue," said Dennis Kissler, senior vice president of trading at BOK Financial.

UBS analyst Giovanni Staunovo said risk-off sentiment has strengthened as trade tensions weigh on sentiment and the IEA report is downbeat.

US Treasury Secretary Scott Bessent said on Monday that President Donald Trump remains committed to meeting with Chinese President Xi Jinping in South Korea this month, as the two countries seek to defuse tensions over threatened tariffs and export controls.

However, developments last week, such as Beijing's expansion of rare earth metals export controls and Trump's threat to impose 100% tariffs and restrictions on software exports starting November 1, have weighed on sentiment.

Beijing also announced sanctions on Tuesday against five US-linked subsidiaries of South Korean shipbuilder Hanwha Ocean, while the US and China will begin imposing additional port fees on ocean-going shipping companies.

Meanwhile, the IEA said the global oil market faces a surplus of up to 4 million barrels per day next year as OPEC+ producers and competitors increase production while demand remains sluggish. In its monthly report on Monday, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, took a less pessimistic view than the IEA. They stated that the oil market supply shortage will narrow in 2026, as the broader OPEC+ alliance continues its planned production increases.

The six-month Brent oil futures price spread is trading at its smallest premium since early May, while the WTI price spread is at its narrowest since January 2024. The narrowing of backwardation, a market term for immediate deliveries commanding a higher premium than later deliveries, suggests that investors are making less money from their oil sales in the spot market because near-term supplies are perceived as abundant. (alg)

Source: Reuters