The global oil market is experiencing an unusual phenomenon, with futures pricing suggesting tightness in the short term, while pointing to a potential “meaningful surplus” further into the future. According to Morgan Stanley, the shape of the Brent crude oil forward curve is unlike anything seen in recent history.

An Uncommon Oil Market Pattern: The ‘Smile’ Curve

Morgan Stanley analysts, including Martijn Rats and Charlotte Firkins, noted that the Brent forward curve is showing a rare pattern, with prices sloping downward across the first nine contracts but rising thereafter. This shape, which analysts described as a “smile,” is an anomaly in the oil market, with little historical precedent.

In their note, the analysts explained, “The curve’s unusual configuration reflects a near-term bullish outlook, driven by tighter supply, while flagging a shift toward a surplus in the medium term.”

Price Movements and Trade War Impact

Brent crude oil (BZ=F) has seen a sharp decline in April, with a 12% drop, driven by the ongoing fallout from the US-led trade war, OPEC+’s rapid supply increases, and growing expectations of a supply glut. The drop in oil prices is compounded by concerns over a future surplus, despite a current premium for near-term barrels, a condition known as backwardation.

However, the forward curve flips into contango – the opposite of backwardation – beyond 2026, indicating that the market expects weaker demand and an oversupply later in the year.

Outlook for Brent Crude Prices

Morgan Stanley forecasts that global benchmark Brent crude will likely fall back into the low $60s per barrel later in 2025. Despite the current market fluctuations, the analysts retained their quarterly price predictions. As of now, futures for June are priced below $65 a barrel, with those for July about $1 lower.

Trade Tariffs and Oil Demand

Analysts from Morgan Stanley warned that “trade tariffs will become a significant headwind for oil demand.” Their crude balance projections show a potential deficit in the third quarter of 2025, but a substantial surplus is expected to follow, contributing to a potential drop in oil prices moving forward.

This outlook suggests that while oil prices may remain elevated in the short term, the longer-term trend points toward oversupply, making the market increasingly volatile.